Understanding Business Financing: Loans, Credit, Bonds, and Forex

Loans are contracts where a financial institution provides an agreed amount of money to a company, which undertakes to return it with pre-set interest according to a depreciation plan until total repayment. Credit is a contract where a financial institution opens a credit line for a company, allowing it to access funds up to an agreed limit. Interest is paid only on the amount utilized, and repayment occurs within a specified period.

Bondholders and Shareholders: As an investor, you have two main choices for investing in a company: purchasing its shares or buying its bonds. Shareholders own stock in a company. Both investments offer opportunities to make money, but each carries inherent risks.

Forex refers to the foreign exchange market. Each country has its own currency, and currency trading is conducted electronically over-the-counter via computer networks. Transactions occur globally, with the market operating 24 hours a day, five and a half days a week, across major financial centers like London and New York.

Key Forex Concepts

• Convertibility: This is the capacity of one currency to be exchanged for another. Only some currencies are convertible. Exporters often price goods and services in a strong currency, typically the dollar, even if it's not their national currency.
• Commission to Exchange: This is the amount charged by financial intermediaries operating in the foreign exchange market. The exchange cost must be added to the cost of goods.

External Financial Resources are funds raised outside the company, including owner contributions and financing from third parties. Internal Financial Resources or Self-Financing are funds generated by the company itself through its business activities, such as depreciation funds, provisions, and retained earnings.

Financing Sources

Short-Term Financing Sources, also known as operating credits, consist of amounts a company owes to suppliers, creditors, and banks due to its economic activity, which are not paid in cash. These are identified as current liabilities, with maturities typically less than one year.

• Trade Credits: These credits arise from delayed payments for purchases made from suppliers, often with terms of 30, 60, or 90 days.
• Credits and Loans: These are resources granted by financial institutions after a negotiation process.

Long-Term Financing Sources include loans, leasing, and contributions from shareholders. Contributions, while external financing, do not represent debt for the company. Loans and leasing, however, do imply a debt that must be repaid.

• Credit and Long-Term Loans: These are typically contracted with banks and have maturities of more than one year, similar to short-term loans.
• Leasing: A written contract where the owner of a specific asset grants another party the right to its exclusive possession for a specified period and under agreed conditions.
• Debt Loans: Large corporations often require substantial capital. To secure these amounts, companies may issue debt, splitting it into aliquots distributed among lenders.
• Issuance of New Shares or Capital Increases: Companies can raise funds by increasing capital through issuing new shares. These do not constitute debt.

Financial Metrics

Break-Even Point

The break-even point (BEP) is a crucial metric. The formula is often represented as: Q = FC / (P - VC), where Q is the quantity, FC is fixed costs, P is price per unit, and VC is variable cost per unit. Total Cost (TC) = FC + (VC * Q). Total Income (TI) = Q * P. Maximum losses occur when TC = FC + (VC * Q(0)). This can also be visualized graphically.

Productivity

Productivity measures efficiency. The best alternative is often expressed as a percentage. For individual productivity (WP), it can be calculated as: WP = Production / (Worker Hours). Percentage change: P = (PN - PN1) / PN1 * 100. Global productivity (GP) can be calculated as: GP = (Production * Price) / (Workers * Hours * Day * Year) + (kg * $ * Production).

Production Possibility Frontier (PPF)

The PPF graphically represents the trade-offs in production. The opportunity cost of producing one good is the amount of another good that must be forgone.