Sources of Company Financing

Corporate financing is the set of resources required to carry out investments or cover liquidity needs. There are different sources of financing, some traditional, and others that have been developed according to needs, trends, and technology.

In this article, we will briefly discuss them to get a general idea of all the possible ways to access financing and their characteristics. They can be classified according to multiple criteria: short or long term, internal or external, and own or external. This makes it easier to create a mental map of how they work. Additionally, at the end of the article, you can find a glossary to understand each one.

External financing can also be classified as public and private: Public financing comes from official organizations. The Official Credit Institute (ICO) grants direct financing or through mediation lines through credit institutions. It can also grant loans via leasing, bonds, etc. Another example is the Galician Institute for Economic Promotion (IGAPE), which, in addition to granting microloans and loans, offers discounts on other loans, such as interest rates. It can also grant non-refundable aids (non-repayable grants).

Among the different types of financing, some are more ethical than others. Ethical financing is increasingly discussed and is currently gaining much importance. There are different funds and cooperatives that allocate their resources to grant financing to social economy projects, with positive social impact, promoting sustainability based on ethical and solidarity principles. There are specific investment funds, as well as banks developed on that basis. At Inversa, we promote the real economy by connecting investors seeking profitability with companies in need of liquidity.

Glossary of Concepts

Trade credit: exists if the right to early payment discount is not exercised (opportunity cost).

Commercial discount: it is a financial operation by which an entity advances to its client the amount of an unpaid commercial effect. Normally, companies send a set of commercial effects for discounting, which constitute a remittance.

Credit account: credits are formalized in documents called credit policies. Their operation is similar to that of current accounts and can lead to debit balances (in favor of the financial institution), credits (in favor of the company), and excesses (amounts that exceed the limit).

Factoring: assignment of credit.

Confirming: payment assignment to the company's suppliers.

Loan: operation by which the client receives a certain amount of money from the financial institution with the commitment to repay this amount and its interests in the form and period set in the contract.

Leasing: operation in which the company needing a good has it by leasing it from the company offering the service, in exchange for a rental fee. At the end of the operation, the contract includes a purchase option. There are different types: operational, financial, and sale and leaseback.

Bond issue: bonds and debentures are fixed-income securities issued by companies and credit institutions (private fixed income), or by the State, Autonomous Communities, or other public institutions (public debt). Bonds, debentures, Treasury Bills, convertible bonds, subordinated debentures, preferred shares, etc., are bonds. An issuance of these securities constitutes a bond issue. Once issued, they are traded in secondary markets, such as the AIAF, stock exchanges, and in the annotated public debt market. There are several types, such as simple or ordinary (also called American), zero-coupon, redeemable, etc.

Equity capital: issuances of equity securities. These are shares issued by corporations. Venture capital entities and business angels are included. Traded shares are traded on secondary markets: stock exchanges (large companies) and the alternative stock market (SMEs). There are different methods to approximate the cost: based on dividends and based on risk (CAPM and APT).

Self-financing: are the funds that the company generates mainly through profit retention. Its cost is identified with the cost of equity capital.