What are the functions of corporate finance
When companies need capital
With successful start-ups, the customer base is growing and new products complement the range. With increasing sales, the need for capital to hire new employees or move into larger business premises increases. Established companies also need fresh capital in order to expand. The companies have various financial resources at their disposal to increase liquidity and finance expansion.
Equity and debt capital for corporate financing
Companies can use their own or third-party capital for financing. Equity are made available by the shareholders through their contributions. Bank balances, real estate and securities are also part of the company's own financial resources.
If a company Borrowed capital used to finance sales, it can be internal or external financing. In the Internal financing the management reinvests profits or sets up provisions. The External financing takes place through bank loans and other investments by third parties, which the company has to repay with interest. In addition, there are special forms that represent a mixture of equity and debt capital. These special forms include leasing, factoring and forfaiting.
Types of corporate finance
Companies use these financial instruments to increase liquidity:
- Bank loan
- Venture capital
- Promotional Loans
- Corporate bonds and borrower's note loans
High requirements for a bank loan
The most common form of corporate finance is bank credit. When applying, however, more and more companies realize that the requirements of the credit institutions on the borrowers have increased. This is mainly due to the Basel III rules. This means Europe-wide regulations of the Bank for International Settlements (BIS), which were issued by credit institutions to improve the equity ratio. With a higher level of equity capital, the banks should be able to bear losses themselves and not have to use public funds in the event of a financial crisis.
Basel III has a direct impact on corporate lending. The regulations force banks not to over-lend and scrutinize borrowers more closely. The bank's review of the loan application therefore takes longer and commercial borrowers have to meet more stringent requirements. The credit institution checks the creditworthiness, equity ratio, sales and tax payments of the company. Numerous documents must be submitted for this and the negotiations about the bank loan can take several weeks. Therefore, financing through a bank is usually not suitable for short-term corporate financing.
Leasing and factoring
Leasing and the sale of outstanding receivables are special forms of external financing for companies:
- Leasing = rental of equipment
- Factoring = sale of outstanding receivables to a factor
Both types of financing can be concluded at short notice and increase a company's liquidity. At the leasing machines or vehicles are rented for a certain period of time. At the end of the agreed term, the lessee can return the rented property or buy it at a previously agreed price. Companies often decide to return and conclude a new leasing contract at the same time. In this way, the companies ensure that their equipment is always state-of-the-art.
By the Factoring a company finances itself from its own resources. The factor credits between 80% and 90% of the invoice amount to the business account one to two working days after submission. The balance is paid on the due date of the invoice. The factor deducts the interest for the pre-financing and its fees from the remaining amount. It is a type of financing in which the creditor has the capital available quickly. In addition, new invoices can be submitted on an ongoing basis. This guarantees a constant flow of payments, which increases with increasing sales. If required, the factor can take over the management of accounts receivable and the del credere risk in addition to the financing.
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