Guide to Business Financing and Investment

Posted on Oct 31, 2024 in Economy

Capital Increase

Companies can obtain funds from abroad through acquiring new capital. An extension means an increase in the number of shares. However, a capital increase doesn’t always mean new resources are contributed. Sometimes, capital is extended through transferring reserves. In this case, no new resources are provided. Creditors might offer participation by converting debt into shares.

Stock Market

Stock markets facilitate buying and selling shares, bonds, and other securities. Market Value = Nominal Value x Price.

Stock Valuation

  • At Par: When the contribution value equals the nominal value.
  • Above Par: When the market value is higher than the nominal value.
  • Below Par: When the market value is lower than the nominal value.

Brokerage and Commissions

Brokerage Fees

Organized securities trading typically involves intermediaries (agencies and stock exchanges) who charge fees for their services. These fees range from 2.5 to 4.5 per thousand.

Bank Charges

If a transaction is through a bank, additional fees apply, ranging from 70% to 100% of the brokerage fee. Sometimes, these fees are applied directly to the cash value, reaching up to 4.5 per thousand.

Grants and Subsidies

Forms of Grants

  • Financial subsidies
  • Sales or tax exemptions
  • Low-interest loans
  • Reduced employer social security contributions
  • Premiums for acquiring specific materials and equipment
  • Property or land transfers (free or at favorable conditions)

Granting Authorities

  • Community Grants: From the European Union.
  • State Aid: From the central government.
  • Autonomous Community Financing: From regional governments.
  • Local Aid: From municipal corporations.

Factoring

Factoring involves a company transferring the recovery of client debts to another company (the factor). Advantages include reduced administrative tasks, immediate financial resources, and elimination of default risk. The main drawback is the high cost, as the factor buys the debt at a lower value to cover risks and costs.

Bill of Exchange

A bill of exchange is a document where a buyer promises to pay a specific amount within a set timeframe.

Discounting

Discounting allows the issuer to receive the bill’s amount in advance by presenting it to a financial institution. The institution provides a lower amount due to commissions and interest.

Formula: d = C * i * n/360

Investment Projects for Aid

To receive aid, employers must prepare an investment project including identification data, project analysis and description, investment programs, working memory, financial report draft, project financial report, and commercial activity memory.

Long-Term External Financing

Bonds

A bond is a fixed-income security making the owner a creditor of the company. It grants the right to collect interest and receive a refund of the provided funds. Bond loan durations vary. The total debt is the loan, while each portion is a bond.

Bond Elements

  • Nominal Value: The amount on which interest is calculated.
  • Interest Rate: Calculated based on the nominal interest rate.
  • Issue Price: The sale price.
  • Repayment Period: When the company returns the contributed amount.
  • Refund of Costs: The amount received upon redemption.
  • Guarantees: Some bonds are guaranteed by company assets.
  • Convertibility into Stock: Allows exchanging bonds for company stock upon redemption.
  • Indexes: Some bond returns are tied to specific indexes, potentially calculated based on company results.

Loans

A loan is a contract where a borrower receives a certain amount from a lender, agreeing to return it under specific terms and conditions.

Interest and Capital

  • Interest: y = C * i * n
  • Final Capital (Simple): Cf = Ci + I
  • Final Capital (Compound): Cf = Ci * (1 + i)^n
  • Depreciation: C * i / (1 – (1 + i)^-n)
  • APR: y = (1 + im)^m

Leasing

Leasing is a contract between a company and a leasing company. The leasing company acquires an asset and rents it to the user company. The contract includes the residual value (the asset’s value at the contract’s end).

Leasing Types

  • Operating Lease: The lessee can revoke the contract under stipulated terms.
  • Financial Lease: The lessee agrees to irrevocable periodical payments and cannot return the asset before the contract ends.

Credit

Credit is an operation where a financial entity promises to provide funds to a customer, either as a lump sum or through partial withdrawals, with interest paid only on the withdrawn amounts.

Credit Types

  • Simple Credit: The bank provides funds until a set limit. The customer repays the outstanding amount at the end of the term.
  • Credit to Account: Also known as revolving credit, it allows withdrawals and deposits.

Financial Ratios

  • Return on Equity (ROE): KRP = Profits available to shareholders / Equity
  • Cost of Capital (Kc): Kc = KRP * (RP / Total Liabilities) + Kra * (RA / Total Liabilities)