In the following work, a complete study will be made of different aspects of great importance in the world of Financial Administration and business activities of organizations.
Financing through Accounts Receivable and Financing through Inventories. On the other hand, there are Long-Term Financing made up of Mortgages, Shares, Bonds and Financial Leases.
Each of the points already mentioned will be studied from the point of view of their Meaning, Advantages, Disadvantages, Importance and Ways of Use; In order to understand their participation in the different commercial activities that are carried out daily.
LONG-TERM FINANCING SOURCES
RULES TO HAVE A HEALTHY STRUCTURE IN A COMPANY:
- The initial working capital of the company must be contributed by the owners. When an expansion or development of the company occurs, the additional working capital on a permanent or regular basis must also be contributed by the owners or be financed through Long-term loans. Temporary working capital can be financed through short-term loans, and it is the one that in most companies requires to cover their work and payment date needs. company (land, buildings, machinery and equipment) must be contributed by the owners.The additional permanent investments required for the expansion or development of the company must be provided by the owners, generally through reinvestment of profits, or they can be financed through long-term loans.
DEFINITION OF SOURCES OF FINANCING
It is the way in which an entity can obtain funds or financial resources to carry out its growth and progress goals.
CLASSIFICATION OF FINANCING SOURCES
INTERNAL SOURCES
Among the internal financing sources, the contributions of the partners (share capital) stand out. Which is divided into two groups:
COMMON SHARE CAPITAL
It is that contributed by the founding shareholders and by those who can intervene in the management of the company. It participates and has the prerogative to intervene in the administration of the company, either directly or through voice and vote in the general shareholders' meetings, by itself or through individual or collective representatives.
Main features
- a) They have the right to speak and vote at general shareholders' meetings b) The return on their investment depends on the generation of profits c) They can participate directly in the administration of the company d) In the event of dissolution of the company, they will recover their investment after the creditors and after the preferred shareholders as far as the shareholders' equity reaches in direct relation to the contribution of each shareholder. e) Participates in the profits of the company in direct proportion to the capital contribution. He is responsible for what happens in the company up to the amount of his share contribution. G) He will receive the return on his investment (dividends) only if the general assembly of shareholders decrees the payment of dividends. H) He almost never receives 100% of the return on investment through dividends,because they allocate a certain percentage to reserves and retained earnings.
Ways to contribute this type of capital
Through contributions either at the beginning of the company or after its creation.
Through the capitalization of retained operating earnings.
PREFERRED SHARE CAPITAL
It is contributed by those shareholders who do not want to participate in the administration and decisions of the company, if they are invited to provide long-term resources that do not impact the cash flow in the short term.
Given its long-term permanence and its lack of participation in the company, the preferred capital is assimilable to a long-term liability, but keeping certain differences between them.
Main similarities between long-term liabilities and preferred capital.
- They are applied in the financing of productive investment projects basically. They do not participate in the losses of the company. In the event of termination of operations, they are settled before common capital. They participate in the company in the long term.
Differences between long-term liabilities and preferred capital.
- Periodic payments of principal and interest are made for the liability, for the preferred capital, only the annual dividend payment (guaranteed payment). The cost of financing the liability is called deductible interest, which is tax deductible, in the In the case of preferred capital, it is called dividends and is not tax deductible. The liability is granted by credit institutions, the preferred capital is generally contributed by individuals or other persons. The liability increases the financial leverage of the company, while preferred capital improves its financial structure.
In summary, preferred capital can be assimilated to a long-term liability disguised by the name of capital that helps the company to achieve its goals without intervening in its administration and improving its financial structure.
SUPPLIERS.
This source of financing is the most common and the one that is frequently used. It is generated through the acquisition or purchase of goods or services that the company uses in its short-term operation. The magnitude of this financing increases or decreases the supply, due to competitive and production market excesses. In times of high inflation, one of the most effective measures to neutralize the effect of inflation on the company is to increase supplier financing. This operation can have three alternatives that favorably modify the monetary position.
- Purchase of higher inventories, non-monetary assets (goods and services), which increases monetary liabilities (accounts payable to suppliers). Negotiation of the extension of the terms of payment to suppliers, thus obtaining monetary financing of an asset not monetary.A combination of both.
Characteristics.
- They do not have an explicit cost. Obtaining them is relatively easy, and is granted fundamentally based on trust and prior to a simple and straightforward credit procedure, before the supplier of the goods and services. It is a credit that is not formalized through of a contract, nor originate commissions for opening or for any other concept. It is a revolving credit that is updated. It grows according to the consumption needs of the client.
RETAINED EARNINGS.
This is the financing base, the most important source of resources that a company has, the companies that have financial health or a large sound or solid capital structure, are those that generate significant amounts of profits in relation to their level of sales and pursuant to your capital contributions.
The profits generated by the administration give the organization great financial stability, guaranteeing its long permanence in the environment in which it operates.
In this category of profits, two main types stand out: operating profits and capital reserves.
OPERATING INCOME.
They are those that the company generates as a result of its normal operation, these are the most important source of resources that a company has, since its generation level is directly related to the efficiency of operation and quality of its administration, as well as the reflection of the present and future financial health of the organization.
Operating profit must be understood as the difference between the sale value actually obtained from the goods or services offered less the costs and expenses actually paid additionally for the amount of depreciations and amortizations charged to results during the year.
CAPITAL RESERVE.
As for the capital reserve, they are accounting separations from operating profits that guarantee the entire stay of the same within the company's flow.
Originally, operating profits and capital reserves are the same, with the difference that the former may be subject to withdrawal by the shareholders through the dividend payment method, and the latter will remain permanent within the capital accounting officer of the company, as long as no capital stock reductions are decreed by means of an extraordinary general shareholders' meeting.
Sources and Forms of Long-Term Financing.
Long Term Loan
A long-term loan is usually a formal agreement to provide funds for more than a year and most are for some improvement that will benefit the company and increase profits. An example is the purchase of a new building that will increase capacity or machinery that will make the manufacturing process more efficient and less expensive. Long-term loans are usually paid off of earnings.
Mortgage.
It is a conditional transfer of property that is granted by the borrower (debtor) to the lender (creditor) in order to guarantee the payment of the loan.
Importance.
It is important to point out that a mortgage is not an obligation to pay since the debtor is the one that grants the mortgage and the creditor is the one that receives it, in case the lender does not cancel said mortgage, it will be taken from him and will go to borrower's hands.
It is worth noting that the purpose of the mortgages on the part of the lender is to obtain some fixed asset, while for the borrower it is to have security of payment through said mortgage as well as to obtain profit from it through the interest generated.
Advantage.
For the borrower, it is profitable due to the possibility of obtaining a profit through the interest generated from said operation.
- Gives the borrower assurance of not getting lost when granting the loan. The lender has the possibility of acquiring a good
Disadvantages.
- The lender generates an obligation to third parties.
There is a risk of some legal intervention arising from non-payment.
Forms of Use.
The mortgage gives the creditor an interest in the property. The creditor will have to go to court and ensure that the merchandise is sold by order of the latter, that is, that the property does not become the lender until the loan has been canceled. This type of financing is generally carried out through banks.
Actions.
The shares represent the equity or capital participation of a shareholder within the organization to which it belongs.
Importance.
They are of great importance since they measure the level of participation and what corresponds to a shareholder on the part of the organization they represent, either by way of dividends, shareholder rights, preferential rights, etc.
Advantage.
Preferred shares give the desired emphasis to income.
- Preferred shares are particularly useful for company merger and acquisition negotiations.
Disadvantages
The use of the shares dilutes the control of the current shareholders.
- The cost of issuing shares is high.
Forms of Use.
The shares are classified as Preferred Shares, which are those that form part of the stockholders' equity of the company and their possession entitles the company to profits after tax, up to a certain amount, and to the assets of the company. Also up to a certain amount, in case of liquidation; On the other hand, there are the Common Shares that represent the residual participation that gives the holder a right over the profits and assets of the company, after having satisfied the priority claims by the preferred shareholders. For this reason it is understood that the priority of preferred shares exceeds that of common shares. However both types of
Shares are similar in that the dividend can be omitted, in that both are part of the stockholders' equity of the company and both have an expiration date.
What elements should be considered regarding the use of the Preferred Shares or, failing that, Common Shares?
The one that is most appropriate should be taken as a source of long-term resource for the investor.
How to sell the Shares?
The most recent issues are sold through a subscriber, the method used to sell the new stock issues is the subscription right which is done through an investment broker.
After having sold the shares, the company will have to take care of its value and consider operations such as increasing the number of shares, decreasing the number of shares, listing and repurchase.
Bonds.
It is an instrument written in the form of an unconditional, certified promise, in which the borrower promises to pay a specified sum at a specified future date, in conjunction with interest at a specified rate and on specified dates.
Importance.
When a corporation is in need of long-term additional funds it is seen in the case of having to decide between issuing additional shares of capital or obtaining a loan by issuing evidence of the debt in the form of bonds. Bond issuance can be advantageous if current shareholders prefer not to share their property and company profits with new shareholders. The right to issue bonds derives from the power to borrow money that the law grants to corporations.
The holder of a bond is a creditor; a shareholder is an owner. Because most bonds have to be backed by the issuer's tangible fixed assets, the owner of a bond may have better protection for his investment, the interest rate paid on the bonds is, therefore, Generally, lower than the dividend rate received by the shares of a company.
Advantage.
The bonds are easy to sell since their costs are lower.
- The use of the bonds does not dilute the control of the current shareholders; they improve the liquidity and the working capital situation of the company.
Disadvantages.
- The company must be careful when investing within this market
Forms of Use.
Each bond issue is underwritten by a mortgage known as a "Deed of Trust."
The bondholder receives a claim or lien against the property that has been offered as security for the loan. If the loan is not covered by the borrower, the organization that the trust can initiate legal action so that the mortgaged property is auctioned off and the value obtained from the sale is applied to the payment of the debt
At the time of arranging for the issuance of the bonds, the borrowing company does not know the names of the future owners of the bonds because they will be issued through a bank and may be transferred, later on, from hand to hand. Consequently, the trust deed of these bonds cannot mention the creditors, as it does when it comes to a direct mortgage between two people. The borrowing company chooses a bank or financial organization to take over the trust as representatives of the future bond owners.
The trust deed conditionally transfers title to the mortgaged property to the trustee
On the other hand, the interest expenses on a bond are fixed charges to the borrower that must be covered when due if it is desired to avoid a possible early cancellation of the loan. Interest on the bonds must be paid on the dates specified in the contracts; dividends on shares are declared at the discretion of the company's board of directors. Therefore, when a company issues bonds, it must be very sure that the use of the money borrowed will result in a net profit that is higher than the interest cost of the loan itself.
Financial leasing.
It is a contract that is negotiated between the owner of the goods (creditor) and the company (lessee) which is allowed to use those goods for a certain period and by paying a specific rent, its provisions may vary according to the situation and needs of each of the parties.
Importance.
The importance of the lease is the flexibility it provides for the company since its possibilities to adopt an immediate change of plans or to take an unexpected action in order to take advantage of a good opportunity or adjust to the changes that occur are not limited. the middle of the operation.
The lease lends itself to financing by parts, which allows the company to use this means to acquire small assets.
On the other hand, the lease payments are deductible from the tax as operating expense, therefore the company has a greater tax deduction when taking the lease. For the marginal company, leasing is the only way to finance the acquisition of assets. The risk is reduced because the property remains with the leased, and the leased may be willing to operate when other creditors refuse to finance the company. This considerably facilitates the reorganization of the company.
Advantage.
It is quite flexible in financing for companies due to the opportunities it offers.
- Avoid risk of rapid obsolescence for the company since the asset does not belong to it. Leases give opportunities to small companies in the event of bankruptcy.
Disadvantages.
- Some companies use leasing as a means of circumventing budget constraints when capital is rationed. A lease requires an interest cost rate. The main disadvantage of leasing is that it is more costly than purchasing an asset.
Form of Use.
It consists of giving a term loan with obligatory periodic payments that are made in the course of a determined term, generally equal to or less than the estimated life of the leased asset. The lessee (the company) loses the right to the salvage value of the asset (which it will keep instead when it has been purchased).
Most of the leases are uncancerable, which means that the company is obliged to continue with the payments that are agreed even when it abandons the asset because it is no longer needed. In any case, a non-cancellable lease is as mandatory for the company as the interest payments it undertakes.
A distinctive feature of a financial lease is that the company (lessee) agrees to keep the asset even if the property belongs to the lessor
While the lease lasts, the total amount of the payments will exceed the original purchase price, because the rent must not only return the original payment of the lessor, but also produce interest for the resources that are committed during the life of the asset.
Long-term loans are the most common form of financing by companies. Under the name of long-term debts and considering who the lender is, the PGC develops subgroups 16, Long-term debts with group and associated companies and 17, Long-term debts for loans received and other items.
Specifically, the accounts he points out are:
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The amortization of the loan (refund of the amount received), and the payment of interest can be made by attending to various systems. Among them, we can mention:
- French system or constant annuities: at the end of each period (year, month, semester) a constant amount is delivered to the lender, consisting of a part corresponding to the return of the principal (loan) and another to interest.
- American system: at the end of each period, interest is paid exclusively and at the maturity of the operation, the principal is repaid. - Constant amortization system: the installments that amortize the loan are constant throughout the term of the loan. As interest is paid on living capital, and as it becomes less and less, the amounts paid are decreasing.
Accounting record
In any of the above cases, it must be taken into account that the interest earned on these debts is explicit and, therefore, does not form part of the repayment value. The PGC 11th assessment standard states:
"Debts will be stated at the repayment value." Therefore, the records will be:
- To obtain the loan:
| Treasury (57) | ||
| to | Debts (16, 17, 51, 52) | |
- For accrued interest:
| Interest on debts… (66) | ||
| to | Short-term interest on debts… (516, 517, 526, 527) | |
- For the payment of interest and return of the principal:
| Short-term interest on debts… (516, 517, 526, 527) | |||
| Debts (-) | |||
| to | Treasury (57) | ||
| Example 1
.:: Solution::.
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Companies need to keep a minimum of cash to finance their daily operational activities, the long-term financial situation may depend on the resources that are obtained in the short term, that is why financial managers must take the necessary measures to obtain these resources, so they must know which are the entities that at some point can help them out of a possible liquidity problem.
The resources of the company are a fundamental base for its operation, obtaining cash in the short term can somehow guarantee the validity of the company in the market, which is why questions such as Where can you get cash quickly?, How much is the cost of credit? What are the financial credit institutions? What should be done to obtain a greater benefit? and many others that with the content of this writing are intended to clarify with the general presentation of the main financing alternatives existing in the financial market.It is intended to analyze and provide the necessary information to have a broad vision of the sources of financing in Latin America and a detailed compilation of the main financial intermediaries and the forms of cash placement on which the line of credit that frames the operations is based. financing.
BANKS
Banking establishments are the mainstay of the Latin American financial system, their main function is to receive funds from third parties on deposit and place them on the market through credit operations. A commercial bank takes the money given by savers plus the capital that belongs to them and offers them on loan in exchange for an interest for the time the money is in their hands and with a guaranteed payment guarantee.
The base of operation of the banks for the granting of credit is based on the "commercial mutual" under the demands of the supervisory entity, (superintendencies) with respect to the term and the interests, since the banking operation is of a character public.
The main credit operations of banks are:
Overdrafts: It is a type of very short-term financing, mainly aimed at covering cash needs. Normally it does not require a written form and its granting is prudential given that, due to the speed in its process, it is normally the manager who individually grants the authorization for its execution. The cost is also agreed on a discretionary basis, without exceeding the maximum limits authorized by law. Eventually and for corporate clients, or as a new product for special clients; In the case of personal banking, so-called "overdraft quotas" have appeared, which can be used automatically by users, although in some cases these operations require additional written form to the traditional current account contract.
Ordinary credits: These are the system by which banks put money into circulation, they are all those loans that the bank offers between ninety days and a year. The cost of said credits is regulated by the limits established by the financial control entities. If these limits were exceeded, the crime of "usury" would be incurred. All ordinary credits are formalized through a title, which is generally a promissory note, which obliges the borrower to grant the corresponding guarantees.
Discounts: Another operation through which banks grant credits is the discount of securities such as promissory notes, money orders, bills of exchange and other debt securities. Through this type of operation, the total value of the title is obtained in advance, charged to a third party, by endorsing the title in favor of the person supported by the delivery and endorsing it to the bank. The cost depends on the discount rate that is applied to the nominal value of the title and the commissions that may have been agreed. If the discount operations backed by securities are not paid on the due date, the endorser becomes solidarity with the bank, which may make the value of the security callable.
Letters of credit: The granting of credits through the opening of letters of credit is the possibly best-known active operation in the framework of international commercial relations that are created in a sale, almost always these credits are agreed to a fixed term, the interests are agreed at a variable rate on the representative rates of the international market, the opening commissions and an insurance for non-use are also charged.
HOUSING AND SAVING CORPORATIONS (CAV)
Savings and housing corporations operate with a basic intermediation scheme, capturing resources through constant value savings accounts, fixed term savings certificates and annual deposits that pay a fixed annual interest.
The credits granted by these corporations are directed primarily to the construction sector, for people who wish to acquire housing, urban reconstruction projects, and for construction of buildings in the industrial, agricultural, mining, and everything related to trade activities.
THE COSTS OF THE CREDITS DEPEND ON TWO FUNDAMENTAL FACTORS: THE MONETARY CORRECTION AND THE INTEREST AGREED BETWEEN THE BORROWER AND THE LENDER.
FINANCIAL CORPORATIONS
Financial corporations are known in financial language as "development banks" and are in charge of financial intermediation aimed at participating directly and actively in the long-term saving and investment process, therefore they dynamically participate in the capital market and provide of medium and long-term resources to the real sector of the economy. Therefore, these entities are the only intermediary authorized to maintain permanent investments in productive companies; This is accomplished with capital contributions.
In addition, financial corporations can, like banks, develop documentary credit operations, credits in foreign currency, grant guarantees and credits in legal currency.
COMMERCIAL FINANCING COMPANIES
Commercial financing companies are intermediaries oriented to finance short and medium term operations, through credits that do not exceed the duration of the contract in more than three years. These entities have lines of credit aimed at financing consumption, with tools such as credit cards and special lines for the purchase of vehicles and durable goods. Its cost is greater than that of bank credit.
FINANCIAL LEASE SOCIETIES (Leasing)
Leasing companies operate as a kind of intermediary, in which a very specific lease is made, among the most important terms for entering into this contract are:
- The client's order to the leasing company to buy an asset. The purchase by the company of the respective asset and delivery under the financial leasing modality.
At the end of the lease, the lessee must pay the leasing company, in case his decision is to acquire the asset; it is an optional decision and the lessee can freely exercise. The cost is settled with interest higher than the bank credit; However, their tax advantages may lead to an effective cost lower than that of an asset through the traditional route, due to the inflation adjustments to which they are subject and the depreciation expenses.
Finally, it is necessary to point out that obtaining loans in the financial market depend on the guarantees that each of the companies can offer, the person in charge of the financial department must provide relative security of obtaining resources in the short term, hence it gives off one of the responsibilities that it has towards the organization.
Sources of Long-Term Financing
Companies that have not reached levels of competitiveness or that intend to develop in other markets, will require promoting and financing new projects to make additional investments in their plants to streamline their production levels to levels of competition, for which they will require financing solutions with competitive costs., like those with other companies.
An example is the purchase of a new building that will increase capacity or the purchase of machinery that will make manufacturing more efficient and less expensive. Long-term loans are usually paid off of earnings.
The process that must be followed in credit decisions for this type of financing implies being based on the analysis and evaluation of the economic conditions of the different markets, which will allow defining the economic and financial viability of the projects. The destination of long-term financing must correspond to investments that have the same character.
Among the sources of long-term financing are:
- Habilitation Credit or Avio Refactionary Credit. Mortgage Credit. Trusts. Financial Leasing. Issuance of Shares. Issuance of Obligations.
Below is an explanation of each of these sources of long-term financing.
- Enabling Credit or Avio.
It is a contract in which the borrower is obliged to invest the amount of the credit, precisely in the acquisition of raw materials and materials in the payment of wages, salaries and direct operating expenses, indispensable for the purposes of his company.
The advantages offered by this type of loan are: a term greater than 180 days, and the security of having funds for a certain period.
- Refactional Credit
It is a credit operation through which an institution empowered to do so, grants financing to a person dedicated to activities of an industrial and agrarian nature, to strengthen or increase the fixed assets of your company, in order to raise or improve the production.
- Mortgage credit
They are liabilities contracted with credit institutions, to be applied in investment projects that involve growth, expansion of productive capacity, relocations, modernizations of plants or projects for new products.
- Trusts
The trust is a legal act that must be in writing, and by which a person called the trustor allocates one or more assets, for a specific legal purpose, for the benefit of another person called the trustee, entrusting its realization to a banking institution called fiduciary, receiving This is the ownership of the assets, only with the limitations of the rights acquired prior to the constitution of the same trust by the parties or by third parties, and with which the trustor expressly reserves and those for which the trust itself is derived.
On the other hand, the banking institution acquires the rights that are required for the fulfillment of the purpose, and the obligation to only dedicate them to the objective that is established in this regard, and must return those that are in its possession when the trust expires, except for a valid agreement in a different sense..
- Financial Leasing
It is an external source of financing for companies. A lease is a contract by which both parties mutually agree, one to grant the temporary use or enjoyment of a thing, and the other to pay for that use or enjoy a price.
This type of lease is fixed in nature, which extends over a long period of time. Upon expiration of the contract you can choose to:
- Buy the good. Extend the term by paying a lower rent. Let the landlord sell the good and share in the profits.
- Issuance of Shares.
Shares are corporate titles whose main function is to attribute to the holder of the same membership of a corporation: they are titles that are issued in a serial and nominative way, they are essentially speculative, whoever acquires a share does not know how much he will earn, since he submits to the result of the businesses carried out by the company, and in the way in which the meeting carried out by the company, and in the way in which the assembly decides to distribute the dividends.
- Issuance of Obligations.
Obligations are credit instruments that represent, proportionally, the liability contracted by a company, for the credit obtained through the disbursements made by its creditors.
Corporations may issue obligations that represent the individual participation of their holders in collective credit constituted by the issuing company.
Conclusion ……
We can conclude by pointing out the importance of both the Long-Term Financing that the different organizations use on a daily basis, giving these institutions the possibility of maintaining a stable and efficient economy and continuity of their commercial activities and consequently granting a greater contribution to the economic sector to which they participate.
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