Running your own business involves constantly looking for funding. There are two sources of financing for enterprises – internal and external. The former are based on the independence of the company, which uses only its own assets. External sources of financing are indispensable help in the event of financial problems of a given organization.
What are the internal sources of financing for companies?
Internal sources of financing for enterprises are – more precisely – the organization’s own funds, its shareholders and shareholders. We distinguish here primarily: own contribution, depreciation, net profit generated by the company and proceeds from the sale of assets. What are the characteristics of each of the options mentioned?
Own contribution – advantages and disadvantages
The most popular and advantageous solution for beginner entrepreneurs – those who are just starting their own business – is to invest their own funds accumulated in a private bank account. This option has several advantages: a guarantee of safe investments (you do not risk high interest if the investment fails) and no additional obligations related to the settlement or recording of funds spent. The disadvantage is – as you might guess – the need to collect a sufficiently large amount of money before starting the company.
Net profit – who does it most often affect?
Another source of financing for companies is the so-called self-financing (using the money earned to cover the costs of further operation of the organization). This is done – primarily – by sole proprietorships (they can spend the accumulated funds for any purposes) or companies (they cannot deposit funds into a private account, and the amounts spent by them must be allocated only for the purposes specified in the law).
Depreciation – a way to lower income tax
Every company can benefit from depreciation deductions for durable goods. They reduce the value of durable goods due to wear and tear, as a result of intensive use over a period of time. This financing is often used for cars, computer equipment or machines. Depreciation reduces the tax base and the amount of income tax payable.
Proceeds from the sale of assets
Some companies sell any part of their assets (not only the products offered, but also materials and fixed assets, e.g. office equipment). It is worth monitoring market conditions and checking which solution is more profitable – selling assets or keeping them at home and using them in the production process.
What are the external sources of financing for enterprises?
Entrepreneurs can also use foreign capital to finance their activities – however, this solution is associated with greater risk. Why? Well, the organization – regardless of the amount of profit – will have to return the borrowed amount (often with interest).
The most common types of external forms of financing for companies are: subsidies (de minimis aid), bank loans, bonds, leasing, factoring, and share issues.
Grants – what are they?
Many – both Polish and foreign – institutions support local entrepreneurs. Especially small and medium-sized companies (start-ups) that have a clear potential for success can count on subsidies from investment funds. Subsidies are investments – selected enterprises will generate high profits, which over time will exceed the invested contribution.
It is also worth mentioning EU funds. Developing enterprises can count on various grants, loans and credits from the European Investment Fund and the European Investment Bank.
Bank loans – a frequently practiced solution
Bank loans are one of the most popular sources of financing for enterprises (from any sector). A company that decides to take out a loan must prepare appropriately. Obtaining a bank loan is not that easy – it involves high costs and limited time to use the funds granted.
The principles of the loan are simple – the entrepreneur takes it out from the bank for some (specific or general) purpose, and then repays everything through installments, in accordance with a previously agreed schedule.
Bonds and share issuance – is it profitable?
Bonds are a special type of debt securities. How it’s working? The company that issues the bonds first incurs debt from their buyers. Over time, however, it gradually „buys back” these securities, increasing the payment amount by a small percentage.
Bonds are rather profitable because they always guarantee a profit, although a small one. Not every entrepreneur will be satisfied with such small amounts of money – company owners therefore decide to buy shares – their value depends on the financial situation of the organization. However, there is a danger. Stocks are a risky move. If everything turns out positively for the entrepreneur, he can count on large profits. However: if the company finds itself in a worse situation, shareholders may be exposed to significant losses. Shares – as a form of financing – apply only to companies (joint-stock companies and limited joint-stock partnerships). Their sale translates directly into profit for the company (it can then allocate its financial surplus to investments, liabilities or operational activities).
The company may eliminate securities. How to do it? This extensive company must outsource this task to the Stock Exchange (after prior approval by the Polish Financial Supervision Authority).
Operating and financial leasing – differences
Leasing is particularly popular among sole proprietorships. There are two types: operational leasing and financial leasing. The basic assumptions are identical in both cases – the entrepreneur receives the leased item (e.g. computer equipment, passenger car) from the lessor (bank, leasing company), and then repays it, thus increasing the company’s fixed costs and reducing income tax.
In short: the differences between operational and financial leasing include, among others: duration of the leasing contract, payment of VAT, method of purchasing the leased item.
In the first case, the owner of the leased asset (for the duration of the contract) is the lessor, and not the user – the entrepreneur can buy the fixed asset only after the end of the contract (in the amount determined in the provisions of the settlement). It is worth adding that the financing entity bears the costs of insurance, repair and replacement of some of the leased equipment.
When it comes to financial leasing, the situation is completely different. In practice, the lessee treats the item as his or her property. It can therefore depreciate the equipment (additionally reducing income tax). After the end of the lease, the entrepreneur receives full ownership of the leased item.
A major inconvenience in financial leasing – especially for new, beginning entrepreneurs – is the need to pay the entire VAT (including the first leasing installment). The opposite is operational leasing, where you do not have to incur any initial financial costs, and VAT (always 23%) is included in each monthly installment.
Factoring – quick financing
Factoring is an external source of financing that gives companies the opportunity to obtain the funds due faster than usual. A factoring company (factor) buys receivables from a given company (factorer).
Factoring is extremely useful in crisis situations when contractors are late in paying invoices and the organization can no longer wait for the amounts due (e.g. due to its own liabilities). Factoring does not require many formalities (there is certainly less paperwork than in leasing or credit), and it does not increase the company’s debt. Enterprises that use the factoring service can count on quick payment of funds, which translates into the ability to settle current liabilities on time.
Summary
There are many sources of financing for companies – both internal and external. You have already briefly explored each of the proposals. It is possible that over time there will be even more new opportunities to obtain funding. Remember that your organization does not have to limit itself to choosing just one source of financing. Focusing on a single option is a risky business move – what will happen to the business if it is taken away from you? Therefore, a good solution is to diversify the basket with financing sources. This will ensure optimal financial security for your business.
Regardless of the funding source you choose, remember to maintain an appropriate planning and budgeting strategy. This right strategic approach has a decisive impact on cash flow (cash flow statement).