Company Funding Sources and Capital Needs

Need for Company Capital

The need for a company's capital relates to the role of company resources and all activities designed to obtain the necessary funds and allocate them for the most rational use. This allocation aims to yield a higher return with less risk and cost.

Sources of Funding

Sources of Funding: By Origin

According to their origin, funding sources can be classified as:

• Internal Resources: Generated by the company itself, constituting reserve funds and depreciation.
• External Resources: Obtained from outside the firm, including contributions from partners, capital increases, loans issued by the company, and various forms of debt through loans and credits.

Sources of Funding: By Ownership

According to the title or ownership, resources can be:

• Own Resources: Can come from external sources, such as contributions from members, or be generated by the business itself (e.g., retained earnings).
• Third-Party Resources: Those provided by third parties that must be returned within a specified period.

Sources of Funding: By Enforceability

According to enforceability, we classify them as:

• Not Required: Meaning it is unnecessary to return them to the owners who contributed (e.g., equity).
• Payable: Obtained from third parties outside the company, which must be paid within a specified time limit along with due interest (e.g., debt).

Sources of Funding: By Time

According to time, funds can be:

• Long-Term Funds: With repayment periods exceeding 12 months.
• Short-Term Funds: With a repayment date of less than 12 months.

Internal Funding Sources: Self-Financing

Self-financing refers to the cash flow generated by the company in operation. This includes profits that the company does not distribute among the members but retains. It also involves the formation of a fund that serves as compensation for the depreciation of assets (depreciation).

Advantages and Disadvantages of Self-Financing

Advantages: Self-financing allows great autonomy for the company, as it reduces dependence on external parties. It is also a way to obtain resources cheaply, as there are no interest payments involved.

Disadvantages: The main drawback for shareholders is the lack of distributed profits. On the stock market, this can result in a lower share price, making the company less attractive to potential buyers.

External Funding Sources

External Equity Funding: Paid-in Capital

Paid-in Capital: Formed by partner contributions. Another possible goal is achieving added value by selling shares at a price above that paid by the initial investors.

External Equity Funding: Grants

Grants: Funds provided by public entities that do not have to be repaid.

Advantages and Disadvantages

Advantages: Allows great freedom of action.

Disadvantages: The primary risk is the potential loss of capital for investors.

External Debt Financing

External Debt Financing: Funds provided by third parties to the company on a temporary basis, requiring repayment.

Characteristics of Debt Financing

Debt financing can be:

• Bank Finance: Discounting bills, loans, or credits from banks or savings banks.
• Non-Bank Finance: From suppliers, factoring, leasing, bonds, etc.

Advantages and Disadvantages

Advantages: One advantage is that the return on assets achieved can be greater than the cost of the debt, potentially increasing the profitability of the company and the return on equity.

Disadvantages: The primary drawback is its cost, which depends on the interest rate applicable in each case.

Cost of Borrowing: Interest Rates

Nominal Interest Rates: These are the rates provided by financial institutions and serve as the basis for calculating interest. They can be fixed (remaining the same) or variable (referencing an index).

Effective Interest Rates (or APR - Annual Percentage Rate): These rates take into account compounding periods when interest occurs more than once a year. For their calculation, all costs, fees, and the term of the operation must be considered.

Types of External Funds

Bank Financial Products:

• Discounting bills or commercial paper.
• Loans.
• Credit lines.
• Obligations (bonds) issued by the company.

Non-Bank Financial Products:

• Creditors and suppliers.
• Factoring.
• Leasing and Renting.