We explain what financing or financing is, what types exist and what their sources are. Also, the financing of a company.
What is financing?
Financing or financing is the process of making viable and keeping a specific project, business or undertaking going, through the allocation of capital resources (money or credit) for it. More simply put, finance is allocating capital resources to a specific initiative.
Financing is a key element in the success of any project or company, since it involves the resources that will be needed to get it started. Every project requires, in one way or another, a certain margin of financing.
For example, in the case of initiatives that will later be able to generate their own financing, it is the initial push that will get the productive wheels moving. In other cases it is the support of an initiative that, otherwise, could not achieve its objectives, such as scientific research, for example.
Generally, issues related to financing are of interest to the financial and accounting departments of companies, or to the administration of projects of another nature. Depending on how it is financed, a venture will have more or less freedom, and more or less time to achieve the initially proposed goals.
Types of financing
There are many types of financing, and many ways to access them. In principle, we will distinguish between two forms of financing depending on who provides the money required:
- Own or internal financing That which comes from the same participants in the project or company, that is, from within the organization: from its investors, owners or shareholders, or from the fruit of its own profits or lucrative activities.
- Third party or external financing That which comes from entities foreign to the project or company, that is, that is assigned by other companies, individuals or institutions and that often requires a certain type of validation, consideration or indebtedness.
Another possible way to classify financing is depending on how long it lasts the same, as follows:
- Short-term financing When it is the result of arrangements that expect to receive results (dividends, findings or the return of money) in short periods (less than a year).
- Long-term financing When it is the result of arrangements that do not expect results in the short term, but rather in longer periods (more than one year), or there is even no obligation to repay, but rather they are selfless contributions to sustain the initiative over time.
Funding sources
Next, we will detail the main ways of obtaining financing that exist, especially those that depend on third parties (external financing):
- Credits They are forms of debt, payable in various periods of time and with various interest margins. They are usually granted by a financial organization (banks, lenders, etc.), although they can also be granted by public institutions, usually on more benevolent terms. Mortgages, bonds, promissory notes and lines of credit are examples of this.
- Incorporation of investors Many initiatives can find financing by opening their team to the entry of new elements, whether they are new shareholders (that is, selling company shares) or new sponsors (to whom in return they provide advertising or recognition for corporate social responsibility work).
- Informal loans Similar in nature to credit, but granted in less formal terms, they may come from a friend, family member, lender or something similar.
- Liquidation of goods or services If the company or venture has goods to sell or services to provide, it can try to finance itself by offering them, as long as this does not prevent it from continuing its existence, or denature the project itself. The sale of advertising space, for example, can be a way to self-finance a project that has massive exposure.
Financing a company
Commercial companies are initiatives that usually require constant investments and intelligent management of their financing sources.
Large companies have shareholders for example, who are partial investors who receive a periodic allocation of money from the dividends generated by the company, depending on how many shares they own. Thus, large investors or majority shareholders receive more than the owners of a few shares.
Shares are participation fees that is, a form of continuous debt, which gives shareholders a greater or lesser right to voice and vote in the management of the company.
Instead of shareholders, Other companies operate based on their own capital that is, the sole owner of it. They can choose to refinance, in case their lucrative activities do not cover their operating expenses, through credits or loans.
However, if necessary, these companies can also decide to open themselves to third-party investment: that other individuals or other companies buy shares within them, thus ceding part of their autonomy to the new capitalist partners.
Continue with: Bank credit
References
- “Financing” on Wikipedia.
- “Types of financing” in Aula mass (Peru).
- “The 7 types of business financing” in Economía3.
- “Financing” in Investopedia (English).
- “Financing” in Business Dictionary.
