Enterprise Financing Sources and Methods

Sources of Enterprise Financing

Under property resources, finance distinguishes between own and external resources. The very purpose of financial resources is that they are owned by the company. These resources include the capital paid by the partners or the owner of the company. Profits are not distributed among the owners; instead, they remain in the business as reserves to cover financial needs.

External resources include all resources from persons or entities outside the company that generate a debt or obligation. These resources come from financial creditors for short and long terms.

Classifications of Financing Sources

Financing by Time Horizon

According to the time horizon of the company's resources, we distinguish between permanent capital resources and short-term financial resources.

• Permanent sources of capital are the inputs from partners, lending and borrowing, or other forms of long-term debt.
• Short-term resources mainly come from suppliers and bank loans and credits.

Internal vs. External Financing

According to their source, financing is distinguished between internal and external.

• Internal financing is generated within the company through its own savings or cash flow.
• All other resources are external funding, coming from outside the company.

Capital Increases

Capital increases involve different ways of valuing shares:

• Nominal value (RCV): The value given to the title at the time of issue.
• Notional value or accounting value (VT): This is given by the relation between equity and the number of existing shares (Equity / Number of shares).
• Market value or stock quote: This is the price paid on the stock exchange for such action. It has no overlap with the previous values.

Types of Self-Financing

Self-financing is a crucial source of funds for enterprises.

1. Enrichment self-financing: This form comes from retained earnings. Depending on the cause for which these profits are retained, there are various types of reserves:

   • Legal reserves: These must be constituted mandatorily (e.g., under a Corporations Act), typically with a minimum percentage of profits until the reserve reaches a certain percentage of share capital.
   • Statutory reserves: These are formed by agreements contained in the company's statutes.
   • Voluntary reserves: These are constituted under a voluntary agreement of the companies.

2. Self-financing through amortization: This aims to maintain the company's equity. It consists of funds that the company allocates to the depreciation of fixed assets, which allows for the renewal of production equipment.

Self-Financing: Pros and Cons

Self-financing allows the company to have greater autonomy and financial independence and to increase its own funds. For SMEs, it is often the main funding source.

However, it can become a drawback, as these resources should not be used to pay interest or fund unprofitable investments. Another drawback is the possible conflict with the interests of shareholders and management. Generally, the less profit is distributed, the better the self-financing potential.