Sources of Finance

17. March 2013 – 17:55

Companies need finance to buy assets (machinery, equipment, ventures), to operate the business (stocks, promotional activities, R&D, Human Resources, rent,…)
The amount of funds is related to the type of business. A small boutique in a rented location has to finance merely stocks. A car manufacturer however needs funds for production facilities, for the production process, the storage, to provide credit to the dealers as well as for R&D.

Questions arising:

  • which sources of finance are available?
  • what are the requirements to apply for a bank loan?
  • types of loan capital and similar sources of finance

Loan capital

Loan capital may be provided by banks and suppliers, by leasing companies or through provisions.

Characteristics of loan capital:

  • provider of finance has no stake in the business
  • loan capital is limited in time
  • provider of loan capital is creditor of the business
  • interest has to be paid
  • repayment has to be made
  • interest payments reduce a company’s profit

Equity capital

Owners provide financial means or new partners are being sought
Auto-financing means that the company retains profit, increases equity capital.
The balance sheet shows retained earnings.
Asset-backed financing – assets are under-evaluated
Depreciation has been earned but not spent on replacement investment – therefore can be used for other purposes.

Characteristics of equity capital:

  • provider of equity capital is partner of the business, has a stake in management
  • equity capital is unlimited in time
  • no interest and repayment duties
  • for taxation profit distribution is not considered as operational expenditure

The following types can neither be classified as equity capital nor as loan capital

Redeployment of capital
e.g. sale of assets (land, ventures) to cover financial needs (due loan payment)

Subsidies
The company receives money from government authorities for the balance of economic disadvantages (e.g. alpine farmers, alternative energy or apprenticeship)

Requirements for getting a loan

A contract between the creditor and the debtor has to be agreed on.
The creditor provides money, delivery of goods, guarantee – the debtor promises the repayment of the capital plus interest in the future.
The creditor assesses the financial standing of the debtor. Is he in a position to repay the money? Therefore the personal as well as the economic credit worthiness of the debtor have to be examined.
Personal: payment morale, education, experience, family
Economic: profit, assets, solvency, capital structure

considerations:

  • creditor
  • volume of the loan
  • type of credit
  • hedging
  • credit period
  • cost of credit
  • modes of repayment
  • notice to terminate

 

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