The two principal sources of financing
Sources
to corporate finance have always been the most special area for entrepreneurs
who are more towards starting a new business. It is possible that the toughest
function of all the many efforts.
Long-Term Source of Corporate Finance
Long-term sources of finance, are generally met from the following sources
Equity is the
funds raised by selling shares of stock in the company. Equity investors become
owners of the company and share in its profits, but also take on the risk of
the company's performance. Equity financing can be obtained through an initial
public offering (IPO) or private equity firms. Equity is the value attributable
to the owners of a business. The book value of equity is calculated as the
difference between assets and liabilities on the company’s balance sheet, while
the market value of equity is based on the current share price or a value that
is determined by investors or valuation professionals. The account may also be
called shareholders/owners/stockholders equity or net worth. Businesses can be
considered sums of liabilities and assets in the accounting equation for
accounting purposes. When business owners start funding operations in their
business this creates a liability on the business in the form of a share of
capital (as the business is its own separate entity.
Debt is the
funds borrowed by the company from various sources, such as banks, financial
institutions, and bondholders. Debt financing typically has a fixed interest
rate and a set repayment schedule. Examples of long-term debt financing include
corporate bonds and bank loans.
Debt
for a company can take the form of a loan or bond. Taking on debt tends to be
risky since debt incurs both interest payments and a necessary repayment of the
principal. The
principal of the debt is not considered an expense, but interest payments are. They
are recorded as operating expenses on a company's income statement and
reductions on the principal are recorded as a reduction in liabilities on the
balance sheet.
Retained earnings are the
profits that a company keeps for itself instead of distributing them to
shareholders as dividends. Retained earnings can be reinvested in the company
for growth and expansion. Retained earnings are the
profits that a firm has left over after issuing dividends. It may also be
called earnings surplus. This account contains all the surplus funds that a
company has retained throughout its existence. It is usually found under the
shareholders' equity section on the balance sheet. The formula for calculating retained earnings is as follows:
Retained earnings = Beginning retained earnings + Net income or loss -
Dividends. For example, a company may begin an accounting period with $7,000 of
retained earnings. These are the retained earnings that have carried over from
the previous accounting period
Lease financing is the
long-term rental of assets, such as buildings or equipment, for a fixed period. Lease financing can be beneficial for companies that do not want to
tie up their capital in purchasing assets. A lease is a contract outlining the
terms under which one party agrees to rent an asset—in this case,
property—owned by another party. Lease financing is a contractual agreement
between the owner of the asset who grants the other party the right to use the
asset in return for a periodic payment and the other party who is the user of
such assets.
Convertible debt is a
type of debt that can be converted into equity at a later date. Convertible
debt is typically used by startups and other high-growth companies that are
looking to raise funds without diluting their ownership stake. It is a form of financing that is often used by
high-growth early-stage companies. It starts off as a loan (debt), but the
lender and the company have options to convert the debt to equity under certain
predetermined terms called “conversion privileges” as specified in the deal’s
term sheet.
Short-Term Sources of Corporate Finance
Short-term funding means financing for less
than 1 year of duration. The need for short-term finance arises to finance the
present assets of the business. Just like raw materials, debtors, finished goods,
shorting of liquid cash or bank balance, and so on. Short-term finance is also
called as working-capital finance. Short-term working
capital can allow you to take advantage of opportunities like expanding your
team, or it can help you overcome challenges like needing to replace a company
vehicle. Businesses can secure financing through short-, medium- and
long-term solutions. Short-term financing is often considered if you need funds
quickly to capitalize on a fleeting opportunity or to cover unexpected costs.
Still, each situation is unique, and knowing the pros and cons of short-term
financing will help you make the right decision. Typically, short-term
financing has a repayment period of one to two years, medium-term solutions can
be repaid over two to five years, and you would have 15 to 20 years to repay a
long-term financing solution.
The short-term financial needs of the companies are generally met from the following sources:
Trade
Credit is an arrangement that allows a business to acquire goods or services
from another business without making an immediate payment. This ability to buy
now and pay later is an important financing tool for businesses, especially
those too new or small to obtain bank loans. When a buyer makes a purchase
using trade credit, ordinarily there is no loan agreement. The seller sends an
invoice along with the products that are being delivered. Trade credit can be
an important source of working capital for businesses, as it allows them to
manage their cash flow and maintain sufficient inventory levels. It can also
help businesses to establish a credit history, which can be important when
seeking other types of financing in the future.
Consumer
Credit is the borrowing of funds by individuals to purchase goods or services
that they cannot afford to pay for immediately with cash. This type of credit
can take many forms, including credit cards, personal loans, car loans, and
mortgages. Credit cards are one of the most common forms of consumer credit.
They allow individuals to make purchases and borrow funds up to a pre-approved
credit limit. Consumers are required to make monthly payments on their credit
card balance, which includes interest charges and any fees associated with the
card. Personal loans, Car loans are a form of secured consumer credit are
another type of consumer credit.
Instalment
Cred is an installment loan or installment debt in which you make fixed
installment payments, whether weekly, bi-weekly, or monthly payments, over a
set period. Mortgages, car loans, and personal loans are common types of
installment credit. The loan term can be a few months up to 30 years like a
mortgage. Installment credit involves the extension of credit from a seller
(and lender) to a purchaser; the purchaser gets physical possession and use of
the goods he has bought, but the seller retains legal title to them until every
installment has been paid. Installment credit is simply a loan you make fixed
payments toward over a set period. The loan will have an interest rate,
repayment term, and fees, which will affect how much you pay per month.
Account
Receivable Financing refers to financing that a company receives for a
portion of its accounts receivable. As the revenue is yet to receive, financing
is claimed by the company on the upcoming revenue. It is a type of financing
where a business sells its accounts receivable to a third-party financial
company, known as a factor. The factor then collects the outstanding invoices
on behalf of the business and pays them a percentage of the face value of the
accounts receivable upfront. Accounts receivable financing can also provide
businesses with other benefits, such as reducing the risk of bad debt and
eliminating the need to collect outstanding invoices. This can free up time for
businesses to focus on other areas of their operations, such as sales and
marketing.
Bank Credit
is an important source of financing for individuals and businesses, as
it allows them to make large purchases or investments without having to pay for
them upfront. However, it is important for borrowers to carefully consider the
terms and conditions of the loan before agreeing to it, including the interest
rate, repayment period, and any fees associated with the loan. Personal loans
are typically unsecured and can be used for a variety of purposes, such as home
improvements or debt consolidation. Lines of credit are also typically
unsecured and provide borrowers with access to a revolving line of credit that
they can draw from as needed. Business loans are designed to help businesses
finance new projects or investments and are typically secured by collateral.
Comments
Post a Comment