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.
Loan capital may be provided by banks and suppliers, by leasing companies or through provisions.
Characteristics of loan 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:
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)
The company receives money from government authorities for the balance of economic disadvantages (e.g. alpine farmers, alternative energy or apprenticeship)
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