Source of financing

Enterprises in different stages of its business must obtain capital for its continued operations and development. The method of obtaining these funds depends largely on the current stage of development of the company, its size and its growth prospects.

In general, we can distinguish the following funding sources:

• Shareholders equity:
  • Reserve capital
  • Main capital
• Foreign equity:
  • Liabilities
  • Long-term liabilities
• Private equity investments

Shareholders equity

Can come both from external sources (capital paid by shareholders in companies) and from internal sources (profit generated by the company left for its disposal)

Shareholders making a contribution of the capital to the company can get it back only when the company is terminated. However, using proper legal procedures equity may be enlarged or reduced, but always ensuring the security of interests of its creditors.

The overriding aim of the changes in equity of the company is making conditions for efficient business operations and ensuring the stability of its development.

Foreign equity

Short-term (with a maturity up to 1 year):

• Short-term bank loans - financing provided by banks, company pays interest or other charges There are:
  • Overdraft
  • Separate account overdraft
  • Lines of credit
  • Seasonal credit
  • Preferential credit
  • Credit bill
• Issuance of short-term securities
• Trade credits and other liabilities

Long-term (with maturity over 1 year):

• Issue of bonds and other securities
• Investment credit

Bankers acceptance

Bankers acceptance is a short-term financial instrument created by a nonfinancial firm. It is a money market instrument consisting of an order to a bank by a customer to pay a sum of money at a future date. It is created and commonly used by firms engaged in international transactions. The purchaser of goods agrees to pay for them at future date, typically within 6 months (maturity), through a bank draft or bill of exchange. A commercial bank accepts the purchaser's promise to pay and guarantees payment. This way bank creates the document called banker's acceptance. Thanks to banker's acceptance a firm which is buying something from a supplier can effectively arrange for the bank to pay the outstanding bill. The bank charges the customer a fee for this service.

Bankers acceptance as trading asset

Banker's acceptances are commercial papers and can be traded in secondary markets. Usually they are purchased by dealer firms at discounts to face value. These instruments have been a popular investment for money market funds. Banker's acceptances are generally available in smaller denominations than commercial papers and are considered very safe assets, because traders can substitute the bank's credit standing for their own.

The choice of financing source

When choosing the optimal sources of finance company should be guided by internal and external factors. The use of foreign capital is crucial for the proper and systematic development. It allows company to reach ever new goals and spread its business. However, the reciprocal relationship of equity and debt should be tailored to the individual circumstances of the company, its prospects for development, innovation policy, the competitive environment, the potential market outlets, and many other equally important factors taken into account in the overall business strategy.

Every company should, therefore, logically and rationally determine the sources of financing of its operations mainly with regard to the stability of the operation and effectiveness of its development.

See also:

• Budget of a project
• Primary market

Source of financing — recommended articles

Acquisition Financing — Funding Operations — Interim financing — Creation of money — Direct paper — Asset base — Capital Base — External sources of finance — Corporate banking

References

• Duffield, J. G., & Summers, B. J. (1981). Bankers Acceptances. Instruments of the Money Market, 126-35.
• Jensen, F. H., & Parkinson, P. M. (1986). Recent developments in the bankers acceptance market. Fed. Res. Bull., 72, 1.
• LaRoche, R. K. (1993). Bankers acceptances. FRB Richmond Economic Quarterly, 79(1), 75-85.
• Lazonick, W., & O'SULLIVAN, M. A. R. Y. (1996). Organization, finance and international competition. Industrial and corporate change, 5(1), 1-49.