Sources of Business Financing: Internal and External Methods

Item 9: Sources of Business Finance

Internal Sources of Financing

These resources are generated within the company's operations:

• Self-financing: Financial resources derived from internal funds (permanent or fixed liabilities) used primarily for fixed assets, but which can also contribute to financing other assets.
• Depreciation: An accounting valuation of fixed assets considered by the company as a production cost, representing the loss of value experienced by the plant or equipment used to produce goods and services for sale.
• Provisions (Forecast): Amounts withheld from income to cover known losses or liabilities which have not yet materialized.
• Retained Earnings (Enrichment): Profits retained by the company to finance new investments, acquire new assets, and enhance productive capacity.
• Sale of Non-Core Assets: Companies may sell property and rights that form part of their assets but are not directly linked to their core productive activity, generating capital.

External Sources of Financing

These resources are obtained from outside the company:

• Spontaneous Financing (Trade Credit): Debt incurred by the company with suppliers, workers, or other non-financial entities by not paying cash immediately, thereby obtaining financial resources for operations.
• Discounting Commercial Paper (Bills of Exchange): The discounting of bills of exchange is one of the most historically utilized instruments of short-term financing for companies.
• Bank Loans: We must differentiate between bank loans and bank credits.
• Leasing (Financial Lease): A contract where the lessor guarantees the lessee the use of an asset in return for a rent paid over a specified period.
• Renting (Operational Lease): A modality involving the rental of assets over the medium to long term, where the lessee undertakes to pay a fixed monthly rent.
• Subsidies and Public Aid: Financial aid obtained from various governmental levels (national, regional, European, and local) or private institutions.
• Bank Credits (Credit Line): An operation whereby a financial institution offers a customer access to a certain amount of money for a specified period of time.
• Factoring: A contract by which a company transfers the responsibility for collecting its accounts receivable (bills and commercial paper) to a specialized financial institution (the factor).
• Long-Term Loans: An operation where a financial institution provides a specific sum of money to a customer, who commits to returning it within a specified period and paying agreed interest and commissions. The customer pays regardless of whether the full amount is used. The amount provided is the principal, and the repayment date is the maturity date.
• Capital Increase (Equity Financing): Companies may choose to issue new shares or increase the nominal value of existing shares. Typically, new shares are issued and purchased by existing or new shareholders, thereby increasing the company's capital.
• Impresit: Companies requiring significant economic resources may face difficulty obtaining traditional financing from financial institutions.