Company Financing: Sources, Types, and Advantages

Company Financing: An Overview

Funding is essential for a company to cover its expenditures and investments. We can distinguish different sources of funding:

Sources of Funding

By Ownership

• Self-financing: Resources belonging to the company's owners.
• External Financing: Funds from third parties.

By Source

• Self-financing: Funds generated by the company's activities.
• External Funding: Inputs from outside sources.

By Duration

• Permanent Resources: Integrate net worth and liabilities.
• Short-Term Resources: Make up current liabilities.

When choosing a source of financing, a company must consider the item being financed and the cost of financing.

Disadvantages of Self-Financing:

• The lack of explicit cost may favor unprofitable investments.
• Conflicts can arise between management and shareholders due to the separation of ownership and management.

4.1 Self-Financing in Detail

Self-financing consists of funds generated by the company to expand or continue its activities. These resources have two origins:

Profit or Loss

• If the firm is profitable, a portion can be allocated to investment.
• Dividend: The part of the profit distributed to shareholders.
• Reserves: Self-financed profits not distributed to shareholders.

Repayments Made

Each financial year, the company expects a loss of value of its assets, recorded as an expense without monetary outlay. This is self-financing for maintenance, allowing the replacement of depreciated equipment.

Benefits of Self-Financing

• Provides the company with greater autonomy and stability.
• Especially beneficial for small and medium-sized companies that have difficulty obtaining external funding.
• Encourages investment and reinvestment of undistributed profits.