Understanding Corporate Finance: Resources, Funding, and Investments
Financial Function
The financial function is responsible for the administration and control of financial resources used by the company.
Objectives:
- Obtain the financial resources that the company needs to develop its core business.
- Determine the most suitable financial structure for the company.
- Select the different types of investments necessary to carry out the core business.
Financing and Investment Terms
Financing: Obtaining the capital or the necessary means to make investments and develop the company’s business activity.
Loan: A contract in which a financial institution delivers to the company a previously agreed amount of money.
Credit Account: A contract in which the financial institution opens a credit line to the company to allow it to have an amount of money until it reaches an agreed limit.
Reserves: Funds that are constituted from the profits generated by the company and not distributed among the owners.
Shareholder: When you purchase a company’s stock, you are buying a piece or share of that company.
Bondholder: When you purchase a bond, what you are doing is lending money to a company in exchange for a predetermined amount of interest.
Types of Financial Resources
According to Ownership:
- Own Financial Resources: These are those that come from the company’s business activity and those other resources that are contributed by the owners. There is no return period. They constitute the non-enforceable liability.
- Other Financial Resources: These are those that the company obtains from investors or financial intermediaries and whose ownership does not correspond to the company. They come from the different forms of indebtedness, resources that must be returned at some point. They constitute liabilities.
According to Origin:
- Funds raised outside the company: Includes the owners’ contributions and other financing.
According to the Return Period:
- Return period less than a year.
- Medium and long term: Return more than a year.
- Internal financial resources: Funds generated by the company.
Short-Term External Financing
Short-term external financing refers to amounts that the company owes to suppliers, creditors, etc., because of its economic activity and which are not paid in cash, debts paid in less than a year.
- Suppliers’ Commercial Credits: Arise because of the delay in the payment of certain purchases made to suppliers.
- Credits and Loans: Resources granted by financial institutions after a negotiation process.
- Commercial Discount: Advanced payment in the amount of the collection rights with regard to the company’s debtors, derived from the operations pertaining to its business activity and from the commercial loans that the company has with third parties.
- Factoring: A financial transaction and a type of debtor finance in which a business sells its accounts receivable that will cover the risk of non-payment as well as an interest in anticipating collections.
Long-Term External Financing
The main sources of long-term external financing are loans, leasing, and contributions from partners/shareholders.
- Credits and Long-Term Loans: Those that are usually contracted with banks and have a maturity of more than one year. Similar to short-term.
- Leasing: An implied contract by which an owner of a specific asset grants a second party the right to its exclusive possession and use for a specific period and under specified conditions, in return for specified periodic rental or lease payments.
- Loans: The state asks for money for government expenditures by using debt; the money is returned in some years with interest.
Differences Between Shareholders and Bondholders
As an investor, you have two choices for investing in a given company.