Business Financing Resources

Finance Problems

A finance problem is distinguished from other problems. In finance problem there are always three factors involved:

Money
Risk
Time

Money should always be considered over time and risk. Aspects that should be taken under consideration are:

The amount of the money.
Who are the factors that invest this scale of amount of money, because there are factors in the market that finance business activities in certain scope, each financing factor has its own reason like external limitation or internal limitation with internal regulation (not financing more than... not financing less than) etc.

Finance Targets

The business activities that the financing can apply for:

In order to perform a capital investment such as:
1. Equipment and machinery
2. Buildings
3. Land
4. Cars
5. Reputation - Active business doesnt have to finance its own reputation since it is something that aggregated during its business activities along the years. In case of interest of acquiring another company, reputation is part of the acquired company assets. Reputation should be financed when acquiring it and not when creating it.
Any activity which is not business routine requires financing, like acquiring other companies (assets, reputation and knowledge), acquiring technology etc.
Financing working capital - Working capital includes:
1. Cash - we do not have to return cash, and today the business activities in cash decrease all the time.
2. Accounts receivable - Customers and in rare cases suppliers as well. Business that provides credit to its customers has to finance this credit.
3. Inventories - Depends of the business activity, there are business types with very large inventory and there are with no inventory at all. If there is an inventory it should be financed.
Financing Research & Development (R&D) activities.
Financing marketing activities.

Finance Resources

There are two major categories:

Debt
Equity

The difference between these two is that debt is actually money that is given to the business as a loan and does not grant partnership in the business. The money is not given as an ownership on the business but as a loan and the lender expect to receive it. There might be a situation that one of the business owners will lend money to the business and will not receive ownership rights for this money and therefore it will be considered as debt and not as equity.

Debt - Resources

Commercial credit - Provided credit that is part of the routine business activity. The credit is provided either from customers to suppliers or from suppliers to customers.
1. Customers credit - Customer provides credit to the supplier, mainly exists in large and long projects, especially when the supplier produces adjusted products to a specific customer and then it is important to the supplier to receive securities and guaranties.
2. Suppliers credit - Supplier provides credit to the customer, therefore the payment for the merchandise occurs in a later date than the supplying of the goods date.
Banks - Loans and Mortgages
Non bank loans - Mainly provided by insurance companies.
Bonds - There are bonds that are traded in stock market and there are bonds that are not.
Leasing - There are factors that expertise in sing fixed assets (very common in cars). In the leasing method the supplier or the leasing company enables to spread payments over the leasing period, however the equipment/car stays under the suppliers/leasing companys ownership.
1. Financial leasing - Renting equipment/car for defined and agreed number of years, maintenance of the equipment/car is under the renting company and at the end of the period there are several options:
  1. Return the equipment/car.
  2. Acquire the equipment/car.
  3. Decision option of acquiring or returning.
2. Operational leasing - The supplier/leasing company enables to rent the equipment/car instead of acquiring it for defined number of years, in this case the leasing company is responsible for the maintenance (fixes and replacement of equipment/car).
Capital that is provided by government - There are two types of debts provided by the government:
1. Grants
2. Improved conditions loans
Convertible bonds - Bonds that are given as a loan but in a later stage there is an option to convert the bonds to stocks. Actually this debt that in a later stage might become equity.
Permanent bond - The payments for this loan include just the interest part. Actually this is a bond without a due date. Usually given by companies, interest is a bit higher and it is a tradable bond.

Equity - resources

Stock issuing from the public, in the stock exchange market.
Private placement - Issuing stocks, not through the stock exchange markets, to an investor. The investor becomes a partner in the company. There are partner that inserts just money and there are partners with added value (beyond money) like accessibility to new markets to technology and etc, these partners are called strategic partners.
Venture capital funds - These funds invests money in highly risky activities and this is for the chance that one or more of the activities will provide a high return on investment.

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