Business Financing Sources: Internal and External

Classification of the Sources of Financing

Funding is used to obtain financial resources (money) to cope with the expenses and investments that the company needs to develop its activity. While selecting the most appropriate financing instruments, the cost, time, and purpose will be taken into account.

Two Types of Financing

Own Funding (Net)

Own funding sources belong to the company or its owners.

Advantages: No cost to the company.

Disadvantages: No sharing of profits or dividends, or reservations.

• Resources obtained: Profits.
• Grants: Funds received from public agencies and private losses.
• Enrichment of self: The distribution of reserves.
• Autofinancing maintenance: The funding is aimed at maintaining domestic production capacity.

External Funding (Liabilities)

The company receives funds from other people who are not owners. This represents a cost of financing through interest payments, taxes, and fees.

External Funding Sources

• Anticipated receipts and postponed payments: The finance company may postpone payments to their suppliers and receive anticipated payments from their customers. The most common terms are 30, 60, and 90 days.
• Grants from public or private bodies: These provide money without having to return it, resulting in a cost of "0" and a form of autofinancing.
• Loans: A financial transaction whereby a person (lender) provides funds to another (the borrower) in exchange for a capital return, together with interest, through periodic payments within an agreed-upon timeframe. There are two types of guarantees:

• Personal Guarantee: A guarantee based on one's heritage, wealth, or annual income.
• Real Guarantee: Goods are based on quantifiable assets with which the borrower provides a guarantee that payments can be made.

• Mortgage: If you take out a mortgage, it is a mortgage guarantee with your own property.
• Pledge: The guarantee operation with financial assets or personal property.

Mortgage loans are made by public deed, instead of collateral by contract or loan policy. The financial cost is composed of:

• Interests (regular payment)
• Cost of attendance
• Opening fee (payable to formalize the loan)
• Brokerage (notary)