Corporate Funding: Strategies & Sources for Business Financing
Sources of Funding
Companies have various options for financial resources, which can be classified based on:
- Ownership: Equity (partners or reserves) and liabilities.
- Time: Long-term or short-term financial resources.
- Source: Internal (self-financing) or external.
External resources include:
- Short-term: Trade credit, bank loans, commercial paper discounts, factoring.
- Long-term: Debentures, loans, leasing, initial capital contributions, capital increases, retained earnings.
Financial Resources of the Company
Social Capital: Constitution and Extensions
The incorporation of initial capital depends on the company type. Large companies often issue shares for funding.
Growing companies need new investments and additional funds, which can come from partner contributions through capital increases by issuing new shares. Share prices in an extension are determined by:
- Nominal value (NV): Equity / number of shares.
- Theoretical value (TV): Capital + reserves / number of shares.
- Market value: The price paid for the share.
Preferential subscription rights protect existing shareholders during capital increases, offsetting share value loss.
Self-Financing or Internal Financing
Self-financing involves retained earnings for expansion or business maintenance, comprising:
- Enrichment Self-Financing: Retained earnings as reserves (legal, statutory, voluntary).
- Maintenance Self-Financing: Funds for equipment wear, depreciation, and provisions for future risks or losses.
Advantages and Disadvantages of Self-Financing
- Advantages: Financial independence and autonomy.
- Disadvantages: Few profitable investments, potential conflicts between shareholders and managers.
Short-Term External Financing
Short-term borrowed funds finance operating cycle activities, including:
- Commercial Credit: Deferring payment to suppliers, effectively a short-term loan.
- Bank Loans and Credits: Receiving funds immediately with interest (loans) or having a credit limit (credit account).
- Trade Discount: Obtaining immediate liquidity by discounting receivables.
- Factoring: A specialized company collects receivables from other companies.
Medium and Long-Term External Funding
Associated with investments in renovation and expansion of equipment and facilities.
- Issuance of Bonds: Borrowing large sums of money.
- Acquisition of Fixed Assets: Financing long-term investments through loans or supplier credits (formalized in bills of exchange).
- Leasing: Acquiring equipment through leasing (financial or operating).
- Financial Leasing: A third party buys and leases the equipment.
- Operating Leasing: The manufacturer leases and maintains the equipment.