A company, like a family, has the need to grow economically; that is, to generate greater wealth that can be distributed among the members that make it up. Normally, this economic growth occurs through expansion projects that require large investments.
For their part, the administrators of a company, like the head of a family, have three ways of obtaining the money they need to carry out growth projects:
1.- Generate cash surplus after meeting your current operating needs. This is the healthiest option, financially speaking.
2.- Request a loan
3.- Partner with someone who has an interest in the company's plans and who partially provides the funds to carry them out.
It should be mentioned that the last two alternatives can be made privately, that is, with creditors and shareholders with whom a direct relationship and contact is established, and publicly, that is, with creditors and shareholders from the general investing public and with whom establishes an indirect relationship through financial intermediaries such as the stock market and its corresponding agents called brokerage houses.
In the following sections, I will make an analysis of two major financing options that an organization has to obtain resources for its investment projects: liabilities and capital, as well as the two large schemes in which these two resources of liabilities and capital can be obtained.: privately and publicly.
Forms of financing
An entity must resort to external sources of financing, when the operation itself does not manage to generate sufficient surplus resources to achieve growth projects or to carry out the operation of the company.
In situations like these, it is common for companies to resort to financing from various entities, among which suppliers and creditors of the financial system stand out. In the latter case, the economic entity resorts to some of the agents that are part of the financial system such as banks, brokerage houses, lessors, factoring companies, warehousing, etc. It is obvious that the previous agents, the best known and the one most widely used is the bank.
You go to a banking institution to request credit with a specific amount, a line of credit up to a certain amount, which can be used several times without exceeding the contracted limit. In both cases, prior to the availability of cash, a credit agreement is signed up to a certain amount, which can be used several times without exceeding the contracted limit. In both cases, prior to the cash disposition, a credit agreement is signed that describes: the terms and conditions under which the cash will be available. Said contract structured in clauses, which refers to the following aspects:
- Amount of credit authorized Interest agreed on the credit Term of the credit, Form of payment of the main lot and accessories Credit guarantees Requirements for the presentation of financial information.
As can be seen, one of the most important clauses is to periodically present financial information in order for the banking institution to periodically monitor the borrower's cash flow generation capacity and, as a consequence, its ability to pay the loan granted.
Finally, it should be added that having bank creditors does not make them owners of the business, if not only they are people with whom a commitment has been made that consists of returning the borrowed money and paying them the cost (interest) of these resources.
Capital: shareholders
In other cases, an economic entity needs to obtain resources in order to continue with its growth plans. Based on the amount of resources needed and the nature of the investment to be executed with the product of said resources, people or institutions interested in the growth project may be invited to contribute their resources to the business. This is called capital and they would become partners or shareholders.
The commitment with a shareholder is much greater than with a simple creditor, in essence, a shareholder becomes the owner of the business, and as such has the right to receive (when there is) a portion of profits obtained by said economic entity, as compensation to your investment. This is called dividends.
Normally, the return that is granted to the people or institutions that contribute their resources to a company and become shareholders is higher than the one that pays for the debt, since it receives a compulsory payment of interest and is also guaranteed, while the capital Yields called dividends are only paid if there are profits and, additionally, there is the potential risk that if the company is poorly managed, the contribution may be lost in its entirety.
Likewise, as owner, you have the right to have timely financial information to monitor business performance and make decisions through the business's own management body: the board of directors.
Obtaining financing in the capital market.
There is another more sophisticated way in which companies, mainly large and well-managed ones, can access sources of financing. This form consists of looking for creditors and shareholders but not directly and privately, when requesting a specific bank financing from a person specifying their contribution as a shareholder, but doing this publicly, through the stock exchange that operates in most countries.
Indeed, a well-managed company, financially healthy, with a good reputation and with strong financing needs, can resort to making a public offering of debt or equity to place it among the general investing public through the stock market. In the first case, the offer would consist of the issue of securities called obligations, while in the second case, the offer would consist of an issue of shares.
As in the previous cases, the persons or institutions that had decided to acquire said obligations, thus lending their resources to an economic entity through the stock market, would become creditors and would receive interest on the amounts loaned.
On the other hand, those people or institutions that have decided to acquire shares in a company, thus contributing their resources to said company, become shareholders and the remuneration they receive for their investment is known as dividends.
The fundamental difference between creditors and shareholders and those who are contacted directly, is that the latter are known and there is close and direct contact with them, while the former are part of the large national or even foreign investing public and the treatment is normally through known financial intermediaries, such as stock exchanges and their members are known as brokerage houses.
Companies whose creditors and shareholders are persons or institutions from which the resource has been obtained through the stock market are known as public companies.
When you find this type of investors, who have decided to lend or contribute their savings based on the trust placed in a company, the financial reporting requirements are much stricter than in other cases and are regulated by a government agency than in Mexico. It is called the National Securities Commission (CNV).
In short, the main users of financial information are creditors and shareholders, contacted directly or indirectly through the stock exchange.
