Business Financing Methods: Debt, Equity, and Liabilities

Long-Term External Financing Methods

Debt Securities (Bonds and Debentures)

A debenture (or bond) is a fixed-income security. The owner becomes a creditor of the company, which gives them the right to collect generated interest and the repayment of capital. The total debt issued is often referred to as a loan.

Operational Financing (Leasing and Renting)

Leasing

This is an operation by which a company acquires an asset in its name and leases it to another company (the user) in exchange for monthly payments.

Renting

This involves paying rent for a machine or vehicle, allowing the company to use it without needing to purchase it. Usually, the fee includes the maintenance and repair of the asset.

Short-Term External Financing (Current Liabilities)

Trade and Commercial Financing

Credits from Suppliers

In many cases, suppliers give customers payment terms. During that time, they are offering, in effect, free financing to the company.

Factoring

This is a type of contract where one company transfers the recovery of customer debts to another company, called the factor, in exchange for immediate payment.

Discounting of Bills

The discount is an operation whereby the drawer gives the bill of exchange to a third party so that they can obtain the amount in advance.

Bank Credits (Credit Lines)

This is an operation whereby a lender agrees to give money to a customer, who can withdraw a lump sum or make partial withdrawals. The customer only pays interest on the amounts that become available.

Internal Financing (Intrinsic Sources)

A) Equity Financing

Capital Increases

The company can obtain new financing through capital increases by selling new shares. These are purchased by existing business partners or new partners. The advantage is that the company does not need to refund the capital or pay interest.

Subsidies and Grants

These include services that provide or facilitate the obtaining of financial resources from public authorities.

Types of Financial Subsidies

• Tax rebates or exemptions.
• Low-interest rate loans.
• Social Security contribution bonuses.
• Raw materials and certain administrative equipment.

Assignment of Property or Land

• Assistance from Community, State, Autonomous Communities, or Local authorities.

B) Passive Financing (Non-Current Liabilities)

Bank Loans

A loan is a contract whereby a person (the borrower) receives a certain amount of money from another (the lender), with the condition to return it within the agreed time and conditions.

Issue of Securities (Bonds/Obligations)

Sometimes the required volume of financial resources is so high that there may be difficulties finding entities to provide it. In this event, the company can choose to split the total resources needed into securities of small face value, denominated as obligations (bonds).