Understanding Business Funding: Types, Sources, and Short-Term Strategies
Funding Issues: Sources and Types
1. Relationship Between Asset Types and Sources of Financing
Assets: Goods and rights of the company. The way assets are distributed determines the economic structure of the company. Assets are divided into two groups:
- Current Assets: Assets and rights that do not remain with the company but circulate and are replaced by others.
- Fixed Assets: Assets that remain fixed in the company for a period of time. Also known as immobilized assets.
Liabilities: Debts and equity. The way liabilities are distributed determines the financial structure of the company. Liabilities are divided into:
- Fixed Liabilities: Sources of funding available to the company for a long period of time.
- Current Liabilities: Debts maturing in a short period of time.
2. Concept of Financing and Types of Sources, Media, and Financial Resources
Financing: Obtaining the necessary means to effect investments.
Types of Funding Sources:
- Contributions from partners (own and external fixed liabilities)
- Self-financing (equity, fixed liabilities, internal)
- Issuance of bonds (fixed liabilities and external funds from outside)
- Medium/Long-Term Debt (fixed passive external funds)
- Short-Term Debt (current liabilities and external funds)
Classification of Funding Sources:
- According to duration: Permanent capital (can be medium to long term) and short-term liabilities.
- According to ownership:
- Own resources: Resources that never have to be returned.
- Resources of others: Resources that are due from the company within a broad time period.
- According to source:
- External Resources: Resources obtained from outside the company.
- Internal Resources: Resources generated by the company with its savings.
3. Short-Term Financing
A) Financing of Operation: Made up of debts to suppliers and non-financial entities; the core is commercial credit.
B) Short-Term Bank Credits: They require a process of negotiation with financial institutions, which may require personal or real guarantees.
- Personal Guarantee: The guarantor is responsible for the repayment of the credit with all their present and future assets.
- Real Guarantee: If the company does not pay, the bank sells the property that serves as a guarantee, and the difference is given to the business after expenses.
Sometimes companies need bank loans to prevent possible unforeseen events. For this, it may be necessary to open a line of credit, which may have a limit through a check.
C) Bills of Exchange:
Discount: Used to raise funds in the short-term from a financial institution. The company anticipates the payment of credits it has over its customers through bills of exchange. This amount is called commercial discount.
Discount Calculation: Interest the bank charges is calculated on the nominal value of effects.
CO.NI D = / B
Where:
- Co = nominal effect
- I = annual interest applied by the bank
- N = time since the discount is made until it ends
- B = base of temporary conversion (b = 1 if n is in years, b = 12 if n is in months…)
D) Factoring: Is a contract by which a company entrusts the collection of bills and effects on its customers to another company called a factoring company or factor.
Advantages:
- Avoids collection work.
- Improves immediate liquidity.
- The risk of default moves to the factoring company.
Disadvantages:
- Has a very high cost.
- Usually requires the principle of wholeness, whereby the factoring company is responsible for all billing of the company.