SOURCES OF FUNDING

Understanding the Preferable Source of Funding

Understanding the Preferable Source of Funding

Introduction

The development of enterprises in any country depends directly on the existence of appropriate financing mechanisms. The innovation of the technology park is one of the activities of organizations that demand more resources for medium and long term. With globalization, companies have realized the need to adapt to new trends in expansion and modernization without compromising its working capital. Companies formalize management strategies, evaluating current investments and seeking to hire liabilities less costly and more appropriate, with the lowest interest rates.

A company has two ways to finance their activity: using equity or third party capital. Typically, equity is those that have no counterpart fixed remuneration i.e.: it is capital that may or may not be remunerated in accordance with the profitability generated by the company. The third-party capital, meanwhile, are those who have a match against a minimum remuneration fixed, which can be fixed or variable rate, according to a market reference rate.

Characteristics of Investment

The Financing can be characterized as debt that has maturity greater than one year. It is obtained from a financial institution as a term loan or by selling securities that are sold to a number of institutional and individual lenders. The process of selling securities, such as stocks, is usually accompanied by an investment bank (a financial institution that assists in private placements and plays an important role in public offerings). Long term loans provide financial leverage, being a desirable component in the capital structure, long as it meets a lower weighted average cost of capital.

In general, the financing of a business matures between five and twenty years. When the term loan is one year maturity, the counters will the loan to current liabilities, because at that point it became a short-term obligation.

Numerous standard clauses of loans are included in loan contracts in the long term. These provisions specify certain criteria regarding satisfactory accounting records and reports, payment of taxes and general maintenance business by the borrowing firm.

Contract long term loans resulting from either negotiated a loan term or the issuance of securities; usually include certain covenants that impose certain operating and financial restrictions to the borrower. Since the lender is committing your funds for a long period, obviously he seeks to protect. Restrictive covenants, along with the standard clauses of loans allow the lender to monitor and control the activities of the borrower to protect the problem created by the relationship between owners and creditors. Without these clauses, the borrower could "take advantage" of the creditor, acting in the direction of increasing the risk of the company, perhaps by investing the entire capital of the company in the state lottery, for example, without being required to pay the lender a return higher (interest).

Cost of Investment

The cost of investment is generally higher than the cost of short-term investment. The contract of investment, and contain standard clauses and restrictive covenants, specifies the interest rate, the timing of the payments and the amounts to be ...