Each organization strives to develop, gaining new opportunities, expanding sales markets, increasing the scale of production, etc. For this, the company management, on the basis of a long and in-depth analysis of the market condition and features of its own enterprise, decides on the need to implement certain projects. These development paths must be profitable. After their implementation in production and financial programs, the company should at least recoup its costs for such events.
In order to be able to increase net profit and develop harmoniously in the market, the organization must look for ways to finance its activities. Such resources should not exceed the total income from their use. Therefore, attracting financing is one of the most important tasks that the management of any company solves.
General concept
Attraction of sources of financing can be made in different ways. However, the ultimate goal is common to them. All sources that finance the activities of the company are attracted to specific projects. In this case, an exact complex calculation is carried out. Risks are taken into account, the probability of making a profit both by the investor and the enterprise.
Project finance can be considered in a broad and narrow sense. In the first case, this concept means the whole set of methods and forms of providing the developed project with the necessary finances. In the narrow sense, project financing is understood as methods and forms of ensuring a certain direction of the company’s activities that will bring profit.
In this article, project financing will be considered in a narrow sense. It will help to understand how risks and income are distributed optimally between all parties. Each project generates a certain level of profit or loss.
Financing options
There are certain ways to attract financing. Each enterprise can introduce new projects into its production activities using its own and borrowed funds. Moreover, in the first case, resources for the implementation of the project are cheaper, but they are not enough for harmonious development.
Borrowed capital is quite high cost. Each investor is waiting for a reward for the company using its temporarily available funds. Therefore, at the end of the deadline, the organization returns the borrowed capital to the owner with interest. This is more expensive capital.
However, without attracting borrowed funds, an enterprise cannot develop harmoniously, conquer new niches in the market, and expand its sales markets. For this reason, almost every organization has resorted to investor assistance. They provide an opportunity for development, increasing the amount of company profit. But for this you have to pay interest. The optimal ratio of borrowed and equity guarantees the maximum amount of profit.
Methods
Fundraising for financing can be carried out by various methods. The company carefully calculates which of the following options is more acceptable in these conditions.
An organization can finance its projects with one of the following methods:
- Share financing. One of the most common methods in this category is to raise equity.
- Self-financing. Own funds of the owner of the company are applied.
- Lending. Bonds are issued or loans are taken from banking institutions.
- Leasing.
- Revenues from budget funds.
Large enterprises can apply several methods that are listed above to implement their projects at once. Funds for ensuring the operation of each activity of the company are presented in the form of cash and non-cash funds.
Domestic financing
The cheapest way to attract financing is called self-financing. This is to ensure the implementation of enterprise projects at the expense of its internal sources. In this case, the authorized capital formed from the funds of shareholders may be applied. This fund is formed during the creation of society.
Also, own flows of funds include flows of funds that are generated as a result of the company’s activities. This amount includes retained earnings, as well as depreciation.
If the company chooses this financing path, it creates a special fund. It is intended strictly for the implementation of a specific project. This method of financing has a limited scope. It is suitable for small projects. For large-scale transformations, the introduction of new production lines of own funds is not enough. In this case, third-party financing is required.
External sources
Attracting external financing in some cases becomes extremely necessary. At the same time, the list of entities ready to provide their temporarily available funds for the use of the organization is quite extensive. It can be both individuals and legal entities. Funds for the implementation of the project can provide both state and foreign investors. Additional contributions from the founders of the organization may also be used.
Each source that can be attracted by the company has its advantages and disadvantages. Therefore, it is extremely important when developing it to develop the right financing strategy. All available methods must be compared with each other. The company at the same time chooses the most profitable type of financing. At the same time, the profitability of investments and the risk in their use are necessarily taken into account.
When using borrowed sources, a scheme for their attraction is being developed. This allows you to calculate the optimal amount of paid funds, which would be enough for each step of the implementation of the created plan.
Further, the ratio of paid and free sources is necessarily optimized. This allows you to reduce the level of financial costs, risks.
Corporatization
Attraction of additional sources of financing can be done through corporatization. This concept includes funds received as a result of an additional issue of shares, as well as shares or other similar contributions to the organization’s authorized fund.
Investors direct a certain amount of their funds to implement the project. In addition, each of them contributes a certain share. Such financing may take several forms.
Corporatization can be done in one of three main methods. The first of these is an additional issue of shares. The second method may be to attract new shares, deposits or other investment contributions of the founders of the organization. In some cases, a third approach is used. It involves the creation of a new enterprise that will work to implement the project.
The presented methods are suitable only if necessary to implement a large-scale, large-scale project.
Bank loans
Attraction of borrowed financing can be carried out at the expense of banks. This is by far one of the most effective forms of project finance. It is suitable for organizations that, for certain reasons, cannot issue new shares. If this type of financing is not practical for a specific project, a bank loan will be one of the best ways to introduce innovation.
The presented resources have a lot of advantages. Bank credit allows you to develop a flexible financing scheme. At the same time, there are no costs for the placement and sale of new securities.
It is by using credit funds of financial institutions that one can obtain the effect of financial leverage. In this case, the profitability of operating own funds increases when using borrowed capital. At the same time, income tax is reduced. The cost of interest is charged in this case to the cost.
Bonds
Attracting financing can be carried out through bond loans. In this case, the company issues corporate bonds for an existing project. This allows you to attract resources on more favorable terms.
In this case, it is not required to provide a security deposit, as when applying for a bank loan. Debt repayment occurs after the end of the entire life of the borrowed funds. Also, you do not need to provide lenders with a detailed business plan.
If difficulties arise during the implementation of the project, the company that issued the bonds may redeem them. Moreover, the price may be lower than in the initial placement.
Leasing
Attracting company financing can be carried out through leasing. This is a complex of relations between the owner and the recipient for the temporary use of movable and immovable property for long-term rent.
Under the contract, the lessor agrees to purchase a property from a particular seller, and then provide it to the lessee for temporary use. The latter has the ability to independently choose the property that he will take for temporary use.
At the same time, the term of the leasing agreement is less than the established duration of the operation of the facility. When the contract expires, the lessee will be able to buy the object at residual value or rent it on favorable terms.
Choosing a type of financing
Attraction of financing is made by comparing several options for attracting resources for the implementation of the project. Only with a sufficiently high benefit from borrowing, the company enters into appropriate agreements. In each case, a certain type of support for a certain direction of the company’s activity is suitable.
Having considered how the attraction of financing occurs , we can understand the principles by which this or that type of resource is selected.