Factoring and Bonds: Funding Strategies for Business Growth
Financing Through Factoring
Factoring involves a specialized company, a factoring company, responsible for collecting receivables from other companies. A company with drafts or bills receivable and immediate cash needs can sell them before maturity to a factoring company, which will charge a fee.
Factoring offers similar advantages to discounting bills, with the added benefit that once the rights are sold, the company is free from the risk of defaults.
The biggest drawback is its high cost, as the factoring company charges a fee to cover the risk and anticipated interest charges.
Funding Outside the Medium and Long Term
Issuance of Bonds (Borrowing)
When a company needs large sums of money, they can obtain it through a loan, a funding method often reserved for large enterprises.
To secure a loan, the company divides the total amount needed into smaller amounts and issues securities equal to that value. These securities are called debentures, bonds, notes, etc., depending on their specific characteristics.
The obligations are offered to the general public, allowing investors who purchase them to become creditors of the company for the value of the securities purchased. They acquire the right to charge interest and receive repayment of the amount paid at an agreed-upon time.
The company, therefore, receives funds from the transfer of securities obligations, which constitute recognition of the debt.
An obligation is a negotiable instrument representing a fraction of a debt owed by the company.
A company issuing a loan engages in long-term borrowing. Typically, these loans have a duration exceeding five years, often reaching ten years or more.
By addressing the general public, the company gains the ability to raise funds for very large loans. However, investors are offered alternative proposals.
Incentives for Investors
- Interest Rate: The price of the loan, essentially the price of money.
- Share Premium: Offering the obligation at a price below face value.
- Redemption Premium: Returning more than the nominal value.
- Convertible Bonds: Obligations that can be converted into shares of the issuer if the owner desires.
- Participatory Obligations: Obligations that offer a share in the benefits generated by the company in addition to the regular fixed rate.
- Indexed Bonds: Since loans are long-term operations, indexed bonds are often issued during times of high inflation. The interest rates vary depending on the rate of price growth to compensate for the loss of money value.
- Appropriations for Acquisition of Fixed Assets.
When businesses, especially medium and small ones, need resources to finance their long-term investments, they have two options: borrow money or negotiate with suppliers.
The Leasing Contract (Lease)
There are two types of leasing:
- Financial Leasing: A company requiring specific equipment approaches a leasing company, which purchases the goods from the manufacturer and leases them to the company. The company must pay rent over the contract’s life, terminating on its own.
- Operating Leasing: The landlord is usually the manufacturer or supplier of the good, also responsible for maintenance and renewal with new models. The contract is terminable by the lessee at any time, so the risk of obsolescence is transferred to the rental company. Its main drawback is its high cost and, therefore, is used in sectors where technology is changing rapidly and where there is high profitability.