Raising funding: ways and recommendations

2024 Author: Howard Calhoun | [email protected]. Last modified: 2023-12-17 10:16

Each organization seeks to develop, gaining new opportunities, expanding markets, increasing the scale of production, etc. certain projects. These development paths must be profitable. After their introduction into production, financial programs, the company must at least recoup its costs for holding such events.

To be able to increase net profit and develop harmoniously in market conditions, an organization must look for ways to finance its activities. Such resources should not exceed the total income from their use. Therefore, raising funds is one of the most important tasks that the management of any company solves.

General concept

Financial sources can be raised in many ways. What they have in common, however, is the end goal. All sources that finance the company's activities are involved in specific projects. In this case, an accurate complex calculation is carried out. Inattention is paid to risks, the probability of 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 necessary finances for the developed project. In a narrow sense, project financing is understood as methods and forms of ensuring a certain direction of a company's activities that will bring profit.

In this article, project financing will be considered in a narrow sense. It will allow you to understand how risks and income are optimally distributed between all parties. Each project generates a certain level of profit or loss.

Funding options

There are certain ways to raise funds. Each enterprise can introduce new projects into its production activities using its own and borrowed funds. Moreover, in the first case, the resources for the implementation of the project are cheaper, but they are not enough for harmonious development.

Loan capital has a fairly high cost. Each investor expects a reward for the use of his temporarily free funds by the enterprise. Therefore, at the end of the established period, 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 inmarket to expand their markets. It is for this reason that almost every organization resorts to the help of investors. They provide an opportunity for development, increase in the company's profit. But you have to pay interest for it. The optimal ratio of debt and equity guarantees the maximum amount of profit.

Methods

Raising funds for financing can be done in various ways. The Company is carefully considering which of the following options is more appropriate under the circumstances.

An organization can fund its projects using one of the following methods:

1. Equity financing. One of the most common methods in this category is equity raising.
2. Self-financing. Company owner's own funds apply.
3. Lending. Bonds are issued or loans are taken from banking institutions.
4. Leasing.
5. Receipts from budget funds.

Large enterprises can use several methods listed above to implement their projects at once. Funds for ensuring the work of each direction of the company's activities are presented in the form of cash and non-cash funds.

Domestic funding

The cheapest way to raise finance is called self-financing. This is to ensure the implementation of enterprise projects at the expense of its internal sources. At the same time, it maythe authorized capital formed from the funds of shareholders shall be used. This fund is formed when a society is created.

Also, own sources of financing include the flows of funds that are formed as a result of the company's activities. This amount includes retained earnings, as well as depreciation funds.

If an enterprise chooses this way of financing, 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, own funds will not be enough. In this case, third-party funding is required.

External sources

Attracting external funding in some cases becomes essential. At the same time, the list of entities willing to provide their temporarily free funds for the use of the organization is quite extensive. It can be both individuals and legal entities. Funds for project implementation can be provided by 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 to develop the right financing strategy when choosing it. All available methods must be compared with each other. Enterprise atThis selects the most profitable type of financing. This necessarily takes into account the return on investment, the risk of using them.

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 to carry out each step of the implementation of the created plan.

Next, the ratio of paid and free sources is necessarily optimized. This allows you to reduce the level of financial costs, risks.

Incorporation

Attracting 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 share or other similar contributions to the authorized capital of the organization.

Investors send a certain amount of their funds to implement the project. In addition, each of them contributes a certain share. Such funding can take several forms.

Corporatization can be done by one of three main methods. The first of these is the additional issue of shares. The second method may be to attract new shares, deposits or other investment contributions from 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 it is necessary to implement a large-scale, large-scale project.

Bank loans

Attraction of debt financing can be carried out at the expense of banks. This is by far one of the most effective forms of project financing. It is suitable for those organizations that, for certain reasons, cannot issue new shares. If this type of financing is not feasible for a particular project, a bank loan is one of the best ways to innovate.

The presented resources have a lot of advantages. A bank loan 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 when using credit funds from financial institutions that you can get the effect of financial leverage. In this case, the profitability of operating own funds increases with the use of borrowed capital. This reduces income tax. Interest costs are charged to cost in this case.

Bonds

Funding can be raised through bond issues. 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 collateral, as when applying for a bank loan. The repayment of the debt occurs at the end of the entire life of the borrowed funds. There is also no need to provide lenders with a detailed business plan.

If there are difficulties during the implementationproject, the company that issued the bonds can redeem them. Moreover, the price may be lower than at the initial placement.

Leasing

Attracting financing of the company can be carried out through leasing. This is a complex relationship between the owner and the recipient for the temporary use of movable and immovable property for long-term lease.

Under the contract, the lessor undertakes to purchase an object of property from a certain seller, and then provide it to the lessee for temporary use. The latter has the opportunity to independently choose the object of property, which 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 the residual value or rent it on favorable terms.

Selecting the type of financing

Funding is raised by comparing several options for raising resources for project implementation. Only with a sufficiently high benefit from attracting borrowed funds, the company enters into appropriate agreements. In each case, a certain type of support for a certain direction of the company's activities is suitable.

Having looked at how funding is raised, one can understand the principles by which one or another type of resource is selected.