Business financing: what it is, types, examples 2023

Although we’ve talked about business loans before, today we’re going to take a step back to understand a little more about business financing. This doesn’t just refer to loans, but to other mechanisms that organizations have to survive and generate profits or savings (depending on the health of each company). Remember that there is oddcoll.com: a website to help you manage your debts and collections, should you need help.

What is corporate finance?

Corporate finance refers to the planning, development and control of a company’s capital structure. Remember that capital is more than just current cash, but also assets, investments and receivables. The aim is to increase the value and profits of the organization through sound investment, financial and dividend decisions. It focuses on capital investments designed to meet a company’s financing needs in order to achieve a favorable capital structure.

Advantages

1. Corporate finance helps predict results thanks to the constant detail that is maintained with performance measurement.
2. They are concerned with improving understanding of financial aspects so that decisions can be made with full knowledge of the subject or the investment to be made.
3. This type of finance represents an approximation to the reality that companies experience, because by worrying about how funds are obtained, or the credit that is delivered to customers, they manage all the necessary information about the capital that is held by the business.
4. The data will always be provided for business forecasting and control. In this way, it is possible to know how and when to invest correctly, avoiding the risks involved in this action.

What are their main functions and why are they important?

1. Companies’ finance departments are responsible for managing and overseeing their companies’ financial activities and capital investment decisions, which include deciding whether or not to go ahead with a proposed investment.
2. Management of liabilities, assets and capital investments.
3. Risk management and financial control: Investments require constant monitoring. Risk management aims to reduce and mitigate the risks assumed with investments and is part of the ongoing monitoring process.
4. Dividend distribution to shareholders: granting or not granting dividends to shareholders.
5. Researching and presenting proposals for investment options.
6. Maximizing the value of the business.

Corporate financing principles

1. Time value of money: This principle states that the value of money varies over time. A dollar today is worth more than a dollar in the future because of the possibility of investing it and earning a return. Corporate finance takes the time value of money into account when evaluating investment projects and making financial decisions.
2. Maximizing shareholder value: The main objective of corporate finance is to maximize the value of the company for shareholders. This involves making financial decisions that generate solid and sustainable returns, increase the share price and distribute adequate dividends.
3. Risk and profitability: There is a relationship between risk and profitability. Companies must assume a certain level of risk in order to obtain higher returns. Corporate finance assesses and manages the company’s financial risks to achieve an appropriate balance between the risk assumed and the expected return.
4. Diversification: Diversification is a fundamental principle for reducing risk. Companies must diversify their sources of income, investments and risks to avoid excessive dependence on a single factor. Diversification helps mitigate the impact of negative events and provides financial stability.
5. Cost of capital: The cost of capital represents the rate of return required by investors to finance a company. Corporate finance analyzes the cost of capital to determine the viability of investment projects and assess profitability.

What are the 4 pillars of corporate finance?

1. Investment: The first pillar focuses on making investment decisions. It involves evaluating and selecting projects and assets in which a company should invest its financial resources. Valuation techniques such as discounted cash flow (DCF) are used to determine the profitability and viability of investment projects.
2. Financing: The second pillar concerns how a company obtains the necessary funds to finance its activities and projects. This includes decisions on the capital structure, i.e. how to combine debt and equity to finance the company’s operations. The choice of funding sources and the management of the cost of capital are key elements of this pillar.
3. Dividends: The third pillar refers to dividend distribution policies and decisions. Companies must determine the amount of profits to distribute to shareholders in the form of dividends and the amount to reinvest in the company for future investment and growth. Dividend management has implications for both shareholders and the company in terms of return on investment and value creation.
4. Risk management: The fourth pillar focuses on identifying, assessing and managing the financial risks to which a company is exposed. These include risks such as interest rate changes, exchange rate fluctuations, asset price volatility and operational risks. Risk management seeks to minimize the company’s exposure to these factors and ensure long-term financial stability.

Examples of corporate finance

1. Issuing shares: A company can raise finance by issuing shares and selling them to investors. This involves offering part ownership of the company in exchange for shares. The funds obtained by issuing shares can be used to finance projects, expand operations or pay off debts.
2. Issuing corporate bonds: Companies can issue corporate bonds to obtain financing. Corporate bonds are long-term debt instruments in which the company undertakes to repay the capital, together with interest payments, over a certain period. Investors buy these bonds and receive regular interest payments.
3. Bank loans: Companies can apply for loans from banks or other financial institutions. These loans can be short-term (lines of credit) or long-term, and the company undertakes to repay the capital together with the agreed interest.
4. Financial leasing: Instead of buying assets outright, companies can opt for financial leasing. This involves obtaining the use of an asset in exchange for periodic payments over a certain period. At the end of the contract, the company may have the option to buy the asset.
5. Venture capital: Start-ups and early-stage companies can obtain funding from venture capitalists. These investors provide capital in exchange for a stake in the company and are willing to take on the risk associated with the company’s growth and development.
6. Internal financing: Companies can also finance themselves through internal sources, such as the profits generated by the company itself. These funds can be reinvested in the company to finance projects or expansions.

The 3 types of company financing

1. Equityfinancing: Also known as equity financing, this refers to raising funds by issuing and selling shares in the company. Shareholders invest their capital in the company in exchange for a partial stake in it. This type of financing does not imply an obligation to repay the capital invested, but shareholders expect to receive income through dividends and share appreciation.
2. Debt financing: This involves raising funds by issuing debt, such as corporate bonds or bank loans. In this case, the company undertakes to repay the capital, together with the agreed interest, over a certain period of time. Debt financing can be an efficient way of raising additional capital, but it also involves paying interest and meeting payment obligations.
3. Hybrid financing: This type of financing combines elements of equity and debt financing. For example, companies can issue convertible bonds, which are debt instruments that can be converted into company shares at a predetermined future date. There are also other hybrid financial instruments, such as preference shares, which have both equity and debt characteristics.

What is the best method for us as a company?

This will depend on the needs of each company. If we have a good shareholder base, the equity option can offer a fairly low risk, as long as the company’s shares improve after the investment. Debt financing can be an option when we have to meet an obligation that has arisen unexpectedly, as long as we meet the interest payments. We should always take good advice before taking any of these actions.

Conclusions

As we have seen, there are different methods for improving company finances, depending on the state of health of each company, its objectives and its possibilities. Let’s remember that, in a changing world, we must always be willing to adapt. We can try different strategies depending on the moment our company is in. First of all, if it’s a cash flow problem, we need to collect all overdue invoices. Oddcoll is a commercial debt collection platform that pursues late payments and also acts as an international debt collection agency.