Complete guide on the external financing for the company

Financing is the act or action through which money is given to a company, organization or individual, that is, this is the contribution of money that is required to start or specify a project, business or activity. The purposes can be diverse but among them, we can find: business development or new projects, new investments, cost support …

But in what way can this action be carried out?

In this guide, we present the different modalities of foreign financing and which one to choose in each case. Go for it!

Differences between own and foreign financing

Image result for differencesThe company, when it comes to financing, can do it internally or externally. While internal financing is that which comes from the company’s own resources, usually profits obtained and not distributed, external or external financing is that which comes from other sources or sources that do not belong to the company.

 

So … What is the financing of others?

 

The external financing is constituted by the external resources with which the company has to meet its payment commitments with suppliers of any kind or to make investments for productive purposes to ensure greater business growth sustained over time. In this way, the continuous financing of the business activity is maintained.

Basically, the basis for the financing of others is that which does not depend either on the company’s own resources or on its undistributed reserves or profits.

Many companies prefer to self-finance in order to avoid the costs of external financial agents, but only through the internal channel, 100% of the needs are generally not met and that is when the need arises to resort to external financing.

 

When to resort to external financing?

Image result for external financing

 

When the objective is to reach an ideal financing model to cover all financial needs, it is necessary to resort to this type of financing.

Diversifying sources and forms of financing will achieve greater viability of the business and the company when both are combined (self-financing or external financing) in an equitable manner.

 

Types and sources of external financing

 

 

The types of external financing are very diverse. The financial methods to obtain financing from outsiders could be divided into:

  • Traditional financing
  • Alternative financing Alternative

The alternative financing of others has been evolving and developing as society has changed and demanded other methods more effective, faster and in better conditions in many cases.

Another classification of external financing could be made taking into account the term:

  • Long-term financing of others
  • Short-term foreign financing

Then, in the infographic, you can have a general overview of the sources. In addition, later we tell you more in detail each method of financing for others according to the term of it.

Short-term foreign financing

Foreign financing in the short term refers to those operations that have a duration shorter than the fiscal year (360 days) . They are usually used to finance part of the usual or ordinary activity.

Within the short-term foreign financing we have the following instruments:

  • Credit account: A credit account is a form of short-term financing in which a company has a credit limit based on needs. The interest will only be paid for the part that is actually used.
  • Commercial discount: The commercial discount is that the operation of short-term financing (30, 45, 60 days generally) offered by financial entities. The client asks the entity for an advance payment of a credit that has not yet expired. The company receives the amount of the nominal value minus the interest generated from this operation and, of course, the management expenses.
  • Loans and short-term loans: When an immediate need arises, a loan or a loan can be requested in the short term-  a knockout post. This request has changed since traditionally it was the bank, who par excellence granted the loans; but currently, there are alternative financing platforms to which to resort to cover this need. You can request the loan or short-term credit through the Internet which shortens the processing periods and allows you to obtain liquidity more immediately. For example, with Crowdlending of our MytripleA platform, you can request a loan in an agile, simple way, without hidden fees, and without amortization costs.
  • Factoring: Factoring is an operation of assignment of credit receivable by the company in favor of a financial entity that may be traditional (banking) or alternative (participative financing platforms). The credits that are transferred are credits derived from the business activity. There are several types of factoring so it is advisable to pay attention to the requirements.
  • Confirming: The confirming could be defined as the financial activity opposed to factoring since it is constituted as the financial instrument by which a company hires a financial entity for the management of payments to suppliers.

Long-term financing of others

Unlike the short term, these operations take place over a period of time greater than the fiscal year. This type of financing is normally intended to undertake investments that have nothing to do with the usual activity and yes to processes of growth, expansion …

Let’s see what are the methods or ways to obtain financing in the long term:

  • Long-term loans and credits: The definition of a loan is the same as the one exposed in the short term, with the nuance of the period that elapses for more than one fiscal year. Long-term loans can also be requested at MytripleA.
  • Capital increases or investments in the capital: It is another method by which the company can support its financing. The idea is to expand the social capital or invite new investors to participate in the percentage of the expansion they wish in the share capital. They invest and the company transfers an aliquot part of it.
  • Leasing: Leasing is a financial lease that has the option to purchase the property subject to it. An initial or entry fee is paid and a periodical fee is fixed before passing ownership of the property. Once this happens, the owner is responsible for all charges or expenses caused by the property during the lease.
  • Renting: The renting is materialized in a contract subject to a specific period of time that will be the period of acquisition, that is, the property acquired is owned by the company during the established period. A fixed fee is paid in which the necessary services that generate the good are included (for example, maintenance costs …).

 

Comparison between short-term and long-term financing

Comparison between short-term and long-term financing

 

In the following table we show you a series of advantages and disadvantages, you will be able to analyze what type of financing you need at each moment.

As you can see from the table, both options have a series of advantages and disadvantages that, depending on the needs or the company itself, will be taken into account. If they are compared, some can be palliated with others and vice versa, so the ideal model is a combination of them to enhance the viability of the business.

Cost of external financing

Everything that is outsourced or contracted through resources outside the company has associated costs in the form of commissions and that is added to the collection of the service provided.

How to calculate the cost of external financing

The calculation of the cost of external financing as such requires an exhaustive analysis of the sources and ways through which to do it.

Each one of the financial methods has a series of commissions, management costs, administration … Even in some cases, you may be required to contract additional products, which will make financing your business more expensive. All these factors must be evaluated. In this way, you will approximate the cost of your external financing.

The interest rate plays an important role in the cost of financing so it will be advisable to go to a loan simulator to know the amount of it.

Once you value the different possibilities, choose the way or source that has less associated costs and better conditions in general for your business.

Cost of debt

The cost of debt ( Kd ) is the cost that a company supports to carry out its activity, project or investment through financing.

Determine the debt is essential to know the possible future profit margin and know if the financing decision was as efficient as expected.

The formula for calculating the cost of the debt is:

Kd = i (1-t)

Where:

  • i is the interest rate applied to the debt
  • t is the type of encumbrance.