Business Financing and Investment Strategies

Business Financing and Investment

Leasing and Renting

• Leasing: This is a financing system by which a company can incorporate elements of fixed assets in exchange for a share (arrendamiento). The leasing company is a financial institution that finances the acquisition of goods and delivers them to the customer-company in exchange for rent (alquiler). When the rental period ends, the company may return the property to the leasing company or buy it according to the price fixed in the contract.
• Renting: This is a modality that involves the rental of movable and immovable assets over the medium and long term (plazo). In a renting contract, the lessee agrees to pay a fixed monthly income for a specified period, and the company undertakes to provide the use of goods for the contract period, perform required maintenance on the property, and obtain insurance against all risks.

At the end of the contract, the renting company offers the lessee the option of replacing the equipment or renewing the contract for a further period to be determined. Unlike leasing, there is no possibility to buy.

Short-Term Financing (C/P)

• Loans and Credits to C/P: Short-term financial instruments.
• Commercial Credit: This is automatic financing a company receives when it delays payment for the purchases it makes from suppliers. The company can work with different materials and supplies purchased, which provides funding for the company until it pays its suppliers. If the provider offers no discount for paying cash, this funding is free.
• Discounting of Effects: Prior to expiration, letters can be transferred to a financial institution to anticipate the amount in the account, after deducting certain amounts in fees and interest. The interest that the bank charges to anticipate this amount is called the discount.
• Factoring: A company provides immediate liquidity to another company (denominated as the factor). This avoids the problem of unpaid and delinquent accounts; unlike the pattern of the discount, the company does not respond to the non-payment of clients. The disadvantage is the high cost of interest and accounting commissions.
• Owed to Public Bodies: These are sources of funding that do not require prior negotiation.

Investment and Asset Acquisition

Investments usually involve the acquisition of some element of fixed assets for financial purposes or to achieve expected future profitability that exceeds the cost of their acquisition.

Key Elements of an Investment

In any investment, there is a stream of receipts and payments that arise throughout its duration:

• Payment: This is the amount of money paid at the time of acquisition. If paid in cash, subsequent payments would not occur throughout most of the investment.
• Temporal Length: The number of years the investment project lasts.
• Cash Flows (Flujos de Caja - CP): This is the difference between the receipts and payments generated in each of the years of the investment.
• Residual Value: The value of the property left at the end of the life of the investment. It is added to the sum of the last cash flow.