The source of financing of the company is all the way it uses to obtain the necessary resources to pay for its activity.
One of the great objectives of any company is its survival, and to guarantee its continuity it must be provided with financial resources. Thus, the sources of financing will be the means used by the firm to obtain funds.
In order for the company to maintain an economic structure, that is, its assets and rights, financial resources will be necessary. These types of resources will be found in equity and liabilities. Another of the purposes of financing sources will be to obtain the necessary funds to achieve the most profitable investments for the company.
Sources of financing on the balance sheet
The different sources of financing are listed on the balance sheet of a company. We can find two large groups, the net worth and the liabilities.
- Net worth: These are the company's own resources, the capital contributions of the partners, the reserves and the undistributed profits.
- Liabilities: It includes the obligations of the company such as bank loans, debts with suppliers or debts with the Treasury.
External financing or self-financing?
When looking for resources to pay for the company's activity, a big question arises: Do we go to external sources of financing or do we finance ourselves? The decision made will determine the future of the company and its independence.
If we opt for self-financing or internal financing, we will use our own resources. The company will enjoy greater independence as it does not depend on foreign capital. However, your investments will be much more limited.On the other hand, self-financing will allow the company to avoid paying the onerous interest generated by debts with third parties.
On the opposite side we find external financing. In it are credits, loans, commercial discounts, the issuance of obligations, factoring or leasing. The contributions of the partners are also considered external financing. However, these do not represent a debt for the company because they must not be repaid.
Types of funding sources
When talking about internal and external sources of financing, we will find the following classification according to their origin:
- Internal funding sources
- Undistributed profits of the company that can be used for capital increases.
- Provisions to cover possible losses in the future.
- Amortizations, which are funds that are used to prevent the company from being undercapitalized due to the aging and loss of value of its assets.
- External funding sources
- Capital contributions from partners.
- Loans, where a contract is signed with a natural or legal person (company) to obtain money that must be returned within a specified period of time and at an interest rate. We will talk about short-term loans if the amount borrowed must be repaid in less than a year.
- Credit line.
- Leasing, which is the contract by which one company assigns the use of an asset to another in exchange for the payment of periodic rental fees for a certain period of time. At the end of the contract, the user of the good or lessee will have a purchase option on the good. It is a source of long-term financing.
- Factoring, which consists of one company assigning the collection of its debts to another.
- Confirming, which is a financial product where a company (client) delivers the integral administration of payments to its suppliers (beneficiaries) to a financial or credit institution.
- Commercial discount, where the rights to collect debts are transferred to a financial institution, which will advance their amount by subtracting commissions and interests.
- I will pay, which is a document that assumes the promise of payment to someone. This commitment includes the fixed amount of money as payment and the period of time to make it.
- Crowdfounding, also called crowdfunding, which consists of financing a project through collective donations. A great platform for this is the Internet.
- Crowdlending, which is a collective financing mechanism by which small investors lend their money to a company with the aim of recovering the investment in the future added to the payment of interest. It is an alternative to bank loans.
- Venture Capital, which are investments through shares used to finance small or medium-sized companies.
- Reciprocal Guarantee Society.
- Venture Capital Company.
- State credits (ICO for example).
- Capitalize public payments (single payment of unemployment benefit for example).
- Public subsidies.
We can also classify the sources of financing according to their maturity:
- Short term: The return period is less than one year. Examples include bank credit and the discount line.
- Long-term: The maturity will be greater than one year. These types of sources include bank loans, capital increases or bond issues.
And according to your property:
- Own financing: These are the financial resources that are owned by the company, as is the case with capital stock and reserves.
- External financing: These are external resources that end up generating debts for the company. A clear example can be bank loans.