Sources of Business Funding: A Comprehensive Guide
Sources of Funding
Classification
A) According to the Source
1. Internal
Generated within the company through savings or cash flow, such as earnings, depreciation funds, and supplies.
2. External
Resources coming from outside the company, including social capital (members’ shares), loans, credits, and more.
B) According to Property
1. Own
Financial resources owned by the company, such as social capital (resources from partners) and reserves.
2. Others
External resources that create debt or obligation for the company, coming from creditors and financial institutions (short and long term).
C) According to Repayment Period
1. Short Term
Resources to be returned in less than a year, such as those from suppliers, bank loans, and credits.
2. Long Term
Permanent sources of capital, including partners’ contributions (other than capital) and long-term loans, to be repaid in a period exceeding one year.
Own Financial Resources
Financial resources owned by the company.
External
Own funding from an external source (social capital).
1. Capital
Capital provided by partners or owners, both initially and through subsequent increases. Social capital is considered external financing.
Self-Financing Enrichment
Retained earnings—profits that partners waive and that become part of the company’s equity (but don’t add to capital).
2. Reserves
- Legal Reserves: Amount fixed by law.
- Statutory Reserves: Established in the Articles of Association.
- Voluntary Reserves: Determined by extraordinary profits, stall reserves, and private grants.
Self-Financing of Maintenance
Funds allocated annually to amortize assets, renew production equipment, and maintain the company’s productive capacity. This aims to preserve the company’s equity and includes depreciation and provisions.
3. Depreciation
Calculated based on the value lost by assets during production. This loss is recorded as a non-cash expense, providing funds for future equipment replacement. Until then, the depreciation fund can be used for investments.
4. Provisions
Funds created to meet losses that haven’t occurred yet or future expenses. These are part of the company’s results.
Financing from Others
Resources to be repaid over a shorter or longer period.
Long Term
5. Bank Loans
The company receives the requested amount immediately and pays interest on the total funds received.
6. Loans
Debt securities (bonds, promissory notes, etc.) issued by companies and purchased by individuals or other companies. Investors become creditors and acquire the right to charge interest and repayment at agreed deadlines. Companies issue debt for large sums when loan conditions from intermediaries are unacceptable. This financing is generally for large companies.
7. Leasing
A medium to long-term financing method allowing companies to use property without equity or credit. Operating leasing is a contract where the lessor leases an asset to the lessee in exchange for rental fees, including a purchase option at the end. Leased assets appear as intangible assets (rights to assets held under finance lease) in the lessee’s books.
8. Renting
Medium to long-term property rental. The company pays fixed monthly income, and the renting company provides and maintains the property. At the end, the lessee can replace the equipment or renew the contract (no purchase option). Renting is recorded as an expense.
Short Term
9. Trade Credit (Supplier)
Deferral of payment for goods from suppliers, equivalent to a credit for the postponement period.
10. Factoring
A specialized company collects receivables from other companies. A company with receivables and cash needs can sell them before maturity to the factoring company, which handles collection. This frees the company from default risk, but at a high cost.
11. Discounting
Companies can turn receivables (bills of exchange, promissory notes, etc.) into cash before maturity through bank discounting. The bank keeps the receivables and pays the company the amount minus commission and interest. The company remains liable for defaults.
12. Line of Credit
Financing for companies with uncertain needs. The bank provides a checking account with an agreed limit. The company uses the funds and pays interest on the used amount plus a commission on the unused portion.
13. Overdraft
Using an amount exceeding the available checking account balance. The company pays high interest on the overdrawn amount.
14. Spontaneous Funds
Financing sources that don’t require prior negotiation, such as amounts owed to Treasury, Social Security, and employee salaries. These act as daily loans to maintain investment levels.