A Review On Funding
Concept of Finance
There are several finance concepts to mention:
Intended to: provide real resources and allocated for development purposes, and offers resources Real those goods and services necessary for the establishment of investment projects, the composition of the new capital and use them to build productive capacities and to create consumer goods and services.
It is also defined as: the supply of necessary funds in times of need.
Funding is therefore the provision of the necessary funds at a time of need and in an adequate amount. And then we conclude that:
Financing is for cash, not goods and services.
Financing should be in the required amounts no more and no less.
The primary purpose of financing is the development of private and public projects.
To provide funding at the right time, i.e. Times of need.
Importance of funding
Financing is considered the nerve of the project and the driving energy of all jobs and works, as there is no work that returns profit or investment that outweighs the benefit without the presence of capital, and as far as the volume of financing and the management of its sources and good investment, projects in general need from the beginning of their activity and:
Create new projects.
Exploitation of frozen financial resources.
Cover the financial deficit of investment entrepreneurs.
Increase in production by operating financial resources.
Provide new job positions which reduces unemployment.
Achieve economic development of the country.
Achieve the well-being of members of the community by improving their living situation. Financing also controls pricing decisions and collection mechanisms in the organization.
Accordingly, we conclude that finance is the blood circulation of enterprises and institutions, that is, funds must be carefully pumped into various channels until operational objectives and investment objectives are achieved, namely, funds must produce additional funds, otherwise they are eroded by inflation and the lack of effective operation of resources.
Forms of financing
Many forms of financing, including:
1 - Direct Financing:
Is relationship lending between the lender and the borrower without the intervention of bodies or a financial intermediary or a bank, where the unit surplus to the financing of the monster deficit in resources, this type of financing takes several forms including:
A-Individuals: an individual may receive a direct loan from another individual, and this process may take place between individuals and institutions whose relationship is in the form of bonds and bills of exchange in order to finance his needs.
B. institutions: the latter may obtain loans and credit facilities from their suppliers, or from other institutions, and these loans take two forms:
Obtaining funds in the form of levies: this is by issuing bonds that are negotiable in the money market.
Obtaining funds from the owners: by issuing new shares, which are considered a title sheet indicating the share of the holder of the ownership of the project.
C. the government may resort to individuals and institutions that do not have a banking nature, such as the issuance by the government of multi-format bonds to be consumed during a certain period at different interest rates such as treasury bills. The number of direct financing methods is one of the number of types of bonds for transferring surplus funds, i.e. the number of transferred values that enable the circulation of surplus liquidity among non-banking economic clients.
2 - indirect financing:
The second form of financing is expressed, that is, by intermediary financial bodies of various types, both banking and non-banking.
Financial institutions act as intermediaries, obtaining savings from individuals and employing them in the form of loans to the needy.
After estimating the investment costs required to implement the project, the search phase begins for funding sources for these costs, between internal sources owned by the project owners or external sources.
Sources of funding
Financing internal and external sources are as follows:
First: internal sources of financing
Internal financing means the ability of the organization to finance its investments without resorting to external sources, through the capital paid by the project owners, and the volume of internal financing varies depending on the size of the investment as well as the degree to which the organization wishes to maintain its obligations to others. Internal financing consists of:
Retained earnings: it is that part of the distributable surplus, which the company achieved from the exercise of its activity in the current year or previous years, and not paid in the form of distributions, which appears in the general budget of the company within the elements of private funds, and the reserved funds are considered within the sources of self-composed funds.
Depreciation: depreciation reflects the undervaluation of investments, or in other words depreciation is defined as an estimate of the loss resulting from the deterioration of the asset's value over time.
Provisions of a reserve nature: provisions are defined as allocations (provisions) formed by the enterprise to meet potential future costs, whether of an exceptional nature or related to ongoing exploitation.
Second: external sources of financing
Resort institution to external sources to cover its fiscal deficit and ensure the continuation of her life, this is when the financial resources are not sufficient, and take these sources the following forms:
1. short-term sources of funding:
A form of external funding, which plays an important role in the continuity of the enterprise's activity and short-term funding sources are commitments that the enterprise must meet within a period of time ranging from one year to eighteen (18) months, and take the following forms:
A - commercial loans: a commercial loan is defined as a short-term loan, granted by the supplier to the buyer, when the latter buys the goods for the purpose of resale, and the buyer needs a commercial loan in case of insufficient working capital to meet the current needs, and when unable to obtain bank loans and other short loans with low cost, and the commercial loan takes the 03) months.
B-bank loans: bank credit consists of loans (advances) obtained by the investor or institution from banks and obligated to repay them within a period of time usually not more than one year.:
Unsecured loans: without collateral, it is usually required to be repaid in a period of time not more than a year.
Guaranteed loans: the bank requires guarantees in return for the loan.
2. medium-term sources of funding:
The company resorts to this type of loan to finance investments related to machinery, equipment and production equipment, and its repayment periods are more than one year and less than ten years.:
A. direct loans: these loans are repaid regularly over a number of years, in which case the repayment instalments are called depreciation payments, in addition, the loan is usually secured by a particular asset or any other type of collateral.
B-financing by lease: in this type of financing the project does not buy the asset but takes advantage of the right to use it, by renting it from its owner or lessor in exchange for payment of the rental amount, some companies have seen the preference to rent the means of production for a certain period instead of buying them at high prices,:
Sale and leaseback: if the company sells one of its assets to a financial institution, at the same time, signs agreement with this foundation to lease this asset and keep it when the company for a certain period.
Service rental: the owner company maintains the rental equipment and includes the maintenance costs to the rental costs.
Financial tenancy: financial tenancy does not include maintenance services and cannot be cancelled by the tenant who is obliged to pay the total installments equal to the value of the leased asset.
3. long-term sources of funding:
This kind of source access it foundation for long-term investments are divided into:
A-shares: this type is used to finance joint stock companies, whose capital consists of a number of equal shares, and each share is called a share, and its owner becomes a partner in the company and has the right to benefit from the profits, as well as bear the loss, and can distinguish two types of shares:
Ordinary shares: from a company's point of view, ordinary shares are one of the main means of long-term financing, and joint-stock companies rely almost entirely on ordinary shares for their permanent financing, especially at the start of formation.
Premium shares: the holder of premium shares enjoys all the advantages and rights enjoyed by the holder of ordinary shares, but there are privileges unique to premium shares than ordinary shares such as: with regard to the receipt of dividends, the permanent right to vote, the right to quote the assets of the company in the event of liquidation, etc.
B. bonds: bonds represent borrowed funds that are used for long-term financing, as they are in fact long-term loans. This long loan is divided into equal parts in value, each of which is called a “bond”, and the bond is a written and sealed undertaking agreement by the party that created it, in which it undertakes to pay periodic interest and pay the agreed amount on a specified and scheduled date.
C. long-term loans: these are loans that are usually intended to finance large investments, and institutions prefer this type of loan for its long duration, and long-term direct financing takes two main forms::
Limited-term loans from commercial banks and insurance companies, the maturity of which is more than one year and less than fifteen years, are repaid in equal installments during the period of such loans.
Loans by issuing new securities and selling them directly to private sources of financing such as insurance companies, pension institutions..., their maturity period is more than fifteen years, the difference between private issuance and limited-term loans lies in the maturity period.