Corporate Finance: Sources and Strategies

Criteria for Classifying Financial Sources

Companies require financial resources both during their inception and throughout their operational activities to facilitate investments. These financial sources can be classified based on ownership, time, and origin.

Classification Based on Ownership

• Self-Financing: Capital provided by partners and retained earnings (reserves).
• External Financing: Resources obtained from external sources, typically debt.

Classification Based on Time

• Fixed Liabilities: Long-term obligations.
• Current Liabilities: Short-term obligations.
• Permanent Capital Resources: Resources that remain within the company for the long term.
• Short-Term Financial Resources: Resources that remain within the company for the short term.

Classification Based on Origin

• Internal Financing: Self-financing and reserves generated within the company.
• External Financing: Resources sourced from outside the company.

Short-Term External Financing

Trade Credit from Suppliers

This involves deferring payment for raw materials. It is an automatic, convenient, and typically free source of financing.

Loans and Bank Loans

Companies can request loans from banks and repay them with interest. This is often used to manage imbalances in the collection and payment cycle.

Trade Discounts or Discounting

When a company needs immediate liquidity, it can sell its receivables (e.g., invoices) to a bank at a discount. The bank charges commissions and interest for the period until the original maturity date. Advantages: Provides immediate liquidity. Disadvantages: In case of default, the bank reclaims the advanced funds and returns the receivable.

Factoring

A factoring company purchases the receivables of other companies. This allows the selling company to obtain liquidity and transfer the risk of default to the factoring company. However, factoring typically involves high costs.

Medium and Long-Term External Financing

Issuing Bonds or Borrowing

The company divides the total amount of money needed into smaller portions and issues them as bonds.

Leasing (Renting)

Leasing involves renting equipment as a financing method. There are two main types:

• Financial Leasing
• Operational Leasing