What is the importance of financing

financing

The expression financing describes all processes for the provision and reimbursement of funds that are necessary for an investment. Colloquially, financing is also understood to mean a earmarked credit. Classic examples of this are car and real estate financing. But consumer-oriented financing also occurs frequently. In this way, for example, computers or TV sets can be acquired.

Our magazine has tips for successful financing or for setting up a company without capital.

What are the prospects for financing?

Financing refers to different processes for the provision of funds depending on the initial situation as well as other different criteria.

  • economy: In business the term describes financing raising capital for business ventures. In particular, the financing is used for the procurement or construction of real estate as well as for operational investments.
  • Balance sheet: Funding from an accounting perspective means raising capital for business ventures. The capital raised through financing is shown in the balance sheet on the liabilities side. The right side of the balance sheet therefore represents the financing side.
  • Finance: From a finance perspective, finance refers to a series of payments. The first payment is the deposit in the form of the loan. This is followed by payments in the form of regular repayment installments with interest.

What is the operational financing?

The operational financing is the basic requirement for investments and is characterized by different characteristics:

Maturity

The so-called term refers to the duration of the financing. This breaks down into short, medium and long-term financing.

  • The short term financing consists of a loan with a maximum term of one year.
  • The medium term financing refers to a loan with a term of between one and five years.
  • The term of the loan in a long-term financing is more than five years.

The higher the term of a financing and thus the term of a loan, the more unfavorable are the conditions for the repayment. These are most clearly reflected in the amount of interest. Long-term loans come with the highest interest rates. In addition, the creditworthiness of the borrower also has an impact on the level of the interest rate.

Financing occasion

The reason for financing describes the reasons that lead to financing. These can go back to the establishment of a company, a company expansion or a company restructuring. Debt rescheduling or financing for special projects, for the purchase of real estate or the construction of real estate can also be considered as a financing opportunity for corporate financing.

Legal status of the investor

The equity and external financing provide information about the legal position of the investor:

  • Self-financing: The so-called self-financing describes the financing of entrepreneurial projects by providing the company with equity. The equity capital can be made available in the form of contributions by the business owner or taken from the company's profits.
  • Debt financing: External financing is provided by organizations or persons outside the company. For example, banks can provide a loan or suppliers can deliver goods or raw materials against an invoice. Bonds or down payments from customers also belong in the area of ​​external financing for companies.

Origin of the capital

Depending on the origin of the capital, a distinction is made between the Outside- and Internal financing.

Corporate finance - overview of the possibilities

What is external finance and internal finance?

In finance one differentiates between one Internal and external financing. Both variants are followed again Equity and debt financing differentiated. External debt financing is provided through a loan. The corresponding self-financing provides for the provision of own funds. Internal self-financing consists exclusively of your own resources. The corresponding external financing is based on provisions. These distinctions are particularly important for companies for accounting and tax reasons, since they have different effects on profit.

External financing

With external financing, financial resources flow directly into a company from outside. The money can be made available to the company by banks, the capital market or by people or groups of people. External financing provides the required funds, for example in the form of deposits by business owners or investments by shareholders. But loans from banks are also part of external financing. This can also provide financial resources through certain special forms of financing, such as leasing. In particular, the following options are available for external financing:

  • Equity financing:Owners of a company can make capital available to the company as an investment.
  • Loan Financing:Banks or other donors provide the company with funds for a precisely defined period of time and according to specified repayment modalities.

Internal financing

With internal financing, the company is provided with funds from its own operations. With internal financing, the capital comes from within the company itself. Internal financing can be provided in the following ways:

  • Financing from provisions:If financing from provisions is used, reserves are set up for this purpose, which are reflected as expenses. The effort leads to a reduction in profit without any immediate payout. In this way, the reserves can be used for financing within the company.
  • Financing from depreciation:Just like the provision, a depreciation also reduces the company's profit without a payout. The funds released in this way can be brought into the company as an investment.
  • Self-financing:This can be done either in an open or silent financing.
    Open self-financing: Open self-financing is also known as retained earnings. The retention of profits is a financing from sales revenues, which quantify a company profit.
    Silent self-financing: For silent self-financing, companies can use the leeway to create hidden reserves. Assets with a lower value or debt values ​​with higher values ​​are identified. This variable valuation leads to the formation of hidden reserves. The profits not reported in this way are retained and used in the form of silent self-financing within the company.
  • Capital release:
    When companies convert tied capital into liquid funds, one speaks of a capital release. Various options are available for this:
    - Sale of company assets
    - Shorter payment terms for customers lead to a minimization of outstanding debts
    - Reduction of stocks
    - Selling accounts receivable through factoring
  • Rationalization:Rationalization saves financial resources through measures in which work processes in the company are improved and thus made more effective. The saved funds can then flow back into the company as investments.

Banks, business angels or something completely different? In the Billomat magazine you can find out what different types of financing are available for founders!

What does factoring mean in corporate finance?

In the area of ​​corporate finance, so-called “factoring” is of great importance. Factoring means that the partner who provided the funds and accordingly has a repayment claim against the debtor, assigns this to a third company. As a rule, he receives 90 percent of the claim in return.

The so-called dual financing is common in the public sector and should enable certain services to be provided (for example, the payment of pension insurance) In this case, the state bears the acquisition costs, whereas the service provider (e.g. the insurance company) bears the costs for ongoing maintenance. The idea of ​​the model has flowed into the real estate finance sector. For example, many banks require the future owner to pay the incidental purchase costs out of pocket, while they only finance the actual purchase of the property themselves.

What is mezzanine financing?

The Mezzanine financing is a mixed form of financing, which consists of external and internal financing. Mezzanine financing can be provided, for example, in the form of profit participation rights, option bonds or silent partnerships. The repayment of the mezzanine capital is usually long-term and with higher interest rates than normal bank loans. Because the investor in mezzanine financing bears a higher risk than banks, because in the event of bankruptcy he takes a lower ranking among the creditors than normal creditors. In addition, mezzanine investors only have a small say in the company.