Corporate Financing Example

Any company, whether public or private, in order to carry out its activities requires financial resources (money), either to develop their current functions or expand them, as well as the start of new projects that involve investment. Whatever the case, “the means by which individuals or legal entities make financial resources available in their process of operation, creation or expansion, internally or externally, in the short, medium and long term, it is known as sources of financing".

The lack of liquidity in companies (both public and private) makes them resort to financing sources, which allow you to make money to meet your current expenses, expand your facilities, buy assets, start new projects, etc.

Economic units require human, material and financial resources that allow them to achieve their objectives.
In every company it is important to obtain financial resources, which may be companies that grant them, and the conditions under which these are obtained. resources, are: interest rates, term and in many cases, it is necessary to know the development policies of the municipal, state and federal governments in certain activities.

"The process that allows companies to obtain financial resources, whether they are their own or others, is called Financing."
All financing is the result of a need, which is why financing is required to be planned based on:

The company realizes that financing is necessary to cover its liquidity needs or to start new projects.
The company must analyze its needs and based on it:
Determine the amount of resources necessary to cover your monetary needs.
The time it takes to repay the loan without jeopardizing the stability of the company, without neglecting the due date of payments, and even grace periods.
Interest rate at which the loan is subject, if it is fixed or variable, if it takes the market leading rate or the percentage cost average and even take several scenarios (different rates with their respective amortization tables), as well as the trend of the inflation. Ø If the loan will be in national currency or in dollars.
-Analysis of financing sources. In this context, it is important to know about each source:
-The maximum and minimum amount that they grant.
-The type of credit they handle and its conditions.
-Types of documents requested.
-Credit renewal policies (restructuring flexibility).
-Flexibility granted at the expiration of each payment and its penalties.
-The maximum times for each type of credit.
-The application of resources. As they are:
-The working capital and how it will be handled and the minimum amount necessary.
-Purchase of furniture and equipment, without neglecting the scheduling for their acquisition, in the event that it is staggered.
-For the construction of offices, in this case, schedule the loans based on the construction and their need (construction program).

However, it is not enough just to know the monetary needs that the company requires to continue its economic life or starting it, it is necessary that certain rules are contemplated in the use of credits:

-Long-term investments (construction of facilities, machinery, etc.) must be financed with long-term credits, or where appropriate with own capital, that is, Circulating resources should never be used to finance long-term investments, since it would cause a lack of liquidity for the payment of wages, salaries, raw materials, etc.
-The financial commitments must always be less than the possibility of payment that the company has, otherwise the company would have have to resort to constant financing, until reaching a point of not being able to liquidate their liabilities, which in many cases is a reason for bankruptcy.
-Any investment that is made must cause flows, which must be analyzed based on their present value, which allows an objective and rational analysis, based on the different methods of evaluation.
-As for the credits, it should be considered that they are sufficient, timely, with the lowest possible cost and that they reach quantitatively cover the need of the project.
-Look for the company to maintain a healthy structure.

SOURCES OF FINANCING

INTERNAL SOURCES
They are those that are generated within the company, as a result of its operations and its promotion, among these are: contributions from partners, reinvested earnings, depreciation and amortization, increases in accumulated liabilities, sale of assets (divestitures).

EXTERNAL SOURCES
They are those that are granted through third parties such as:

SUPPLIERS
This source is the most common and the one that is used most frequently, it is generated by the acquisition or the purchase of goods and services, which the company uses for its operation, either short, medium or long term. The amount of the credit depends on the demand for the market good or service. This source of financing must be carefully analyzed in order to determine its real cost, such as: discounts for prompt payment, the time of payment and its conditions, as well as the investigation of the sales policies of different providers that exist in the market.

BANK CREDITS
The main credit operations, which are offered by banking institutions according to their classification are:

SHORT TERM

THE DISCOUNT
This is an operation that consists of the bank acquiring property, bills of exchange or promissory notes. This operation is formalized through the transfer of ownership of a credit title, its granting is supported by the trust that the bank has in the person or company from whom the discount.

CHIROGRAPHIC AND COLLATERAL LOAN
Also called direct loans, the first takes into consideration for its granting, the personal qualities of the subject of the credit such as: their moral and economic solvency. As for the loan with collateral, it is the same as the direct loan, except that it operates with an additional guarantee of collateral documents from bills, or promissory notes for the purchase and sale of merchandise or bills of exchange commercial. They are direct loans backed with promissory notes in favor of the bank and whose interests are specified, as well as arrears, if applicable. This type of credit has a maximum term of 180 days, renewable one or more times, as long as it does not exceed 360 days.

LEGAL LOAN
This type of credit exists to be granted by a non-immovable real guarantee. A promissory note is signed describing the guarantee that covers the loan. The banking law establishes that these should not exceed 70% of the value of the guarantee, unless they are loans for the acquisition of durable consumer goods.

SIMPLE CREDITS AND CURRENT ACCOUNT
They are conditional credits, in which it is necessary to introduce special credit conditions and requires the existence of a contract. These credits are operations that by their nature should only be applicable to the promotion of commercial activities or for interbank operations.
LONG-TERM.

INDUSTRIAL UNITS GUARANTEED LOAN
The credit is formalized through an opening contract, this can be used for cash service, payment of liabilities or to solve some other financial problems of the company.

ROOM OR AVOID CREDITS AND SPARE PARTS
This type of credit serves to support production specifically aimed at increasing the company's production activities.
The accreditation loan is used specifically for the acquisition of raw materials, materials, salary payments and direct operating expenses, essential for business purposes.
The refactional credit is used to finance the means of production, such as: farming instruments and tools, fertilizer, livestock, livestock, plantations, opening of land for cultivation, buying facilities or machinery, construction of works, necessary for the promotion of the company that is granted the credit. This type of credit opera by entering into a contract.
Both credits are supervised and are only granted to individuals, groups or companies with industrial, agricultural and livestock activities.

REAL ESTATE SECURED LOAN
Also known as mortgages, their term is greater than five years. This loan is used to finance production activities or means of production, or the purchase of houses.

CREDIT DISCOUNT ON BOOKS
This type of credit is similar to the discount of documents, except that, what is discounted are debts in an open account, not backed by credit titles. The credit institution establishes a line of credit based on a portfolio of clients that delivers the applicant, who is obliged to collect from his debtors, the applicant paying a percentage of said purse.

CREDIT CARDS
They are the lines of credit granted to the main officials of the company, where all purchases of goods and services they perform are charged to the accredited company account, so their use must be careful. To avoid paying interest, the company must make the payments within the established company.

PRIVATE CREDIT
This uncommon source of financing, and includes the contributions that owners make in the form of loans, friends of the company or affiliated companies, the interest rate and terms stipulate through contract.

FINANCING OF THE STOCK MARKET SYSTEM

A) COMMERCIAL PAPER.
It is a promissory note signed without guarantee on the assets of the issuing company, in which it stipulates a short-term debt, which will be paid On a certain date, its omission corresponds to a corporation registered in the national registry of intermediary securities will be (R. N. V. I.) It is used to finance working capital, it does not have a specific guarantee, its term is a minimum of 15 days and a maximum of 180 days, which is agreed between the placement brokerage house and The issuer, its nominal value is $ 100 or its multiples, they are acquired by Mexican or foreign individuals and legal entities, it is guarded by the institute for the deposit of securities (INDreview).
Commercial paper is a relatively new and little-known financing instrument. It consists of the issuance of credit titles (promissory notes), using a brokerage house or financial institution as intermediary, which places said commercial paper among its clients, thus combining two operations important:
1.- On the one hand, it grants financial resources to a company in need of them.
2.- On the other hand, it provides an additional investment instrument to its investors.
In other words, the investor and the entrepreneur marry the two parties to the operation, leaving the placement institution in the middle of both parties.
The main characteristics of commercial paper are:
-Nominal value of $ 100,000, or its multiples
-Term from 7 to 180 days
-Authorized line of issuance for one year
-The issuers must be mercantile companies
-They may or may not have a specific guarantee.
-They are quoted at a discount price
-The benefit for the investor is given by the rate of return.
-Commercial paper is issued in short terms, which are generally 26 days, after a credit analysis by the institution underwriter and with the authorization of the National Securities Commission and the issuance is registered in the Mexican stock exchange of Values. The main advantages of this financing instrument are:

The total cost of the issuance and, therefore, the real cost of the resources received, is considerably lower than the cost of the money coming from the credit institutions.
Despite being 28-day issues, their revolving can give them a duration of one year, extendable for at least one additional year, which makes these resources a medium-sized financing term.
For the investor, it represents a highly profitable investment instrument, compared to other existing fixed income instruments.
The main types of commercial paper are:
a) Unsecured.- Without specific guarantee, backed by all the assets of the issuing company.
b) Guaranteed.- The guarantee of a credit institution is given as a guarantee, or a guarantee is issued from a surety company.
c) Indexed.- It is commercial paper denominated in national currency and subject (indexed) to the free sale exchange rate of the US dollar.

Through commercial paper operations, temporary surpluses of corporate treasury and individuals are channeled to other companies that require them and accept, those who pay for its use a premium or rate on the return (passive interest) that the creditor could obtain in some other investment instrument, such as the CETES.

B) BANK ACCEPTATIONS
They are bills of exchange drawn on by companies, domiciled in Mexico, at their own order and accepted by multiple banking institutions, based on a credit line granted by the institution to the issuing company, they are issued by legal entities, their financing is short-term, their term is seven and 182 days in multiples of seven, those paid by a multiple banking institution, their value is $ 100 or its multiples, they can be purchased Natural and legal persons, Mexican and foreign, the commission is on behalf of the issuer, its custody corresponds to INDreview or banking institutions multiple (IDBM).

C) GARMENT BONDS.
They are certifications of deposit in a document, issued exclusively by the general deposit warehouses, which accredits ownership of the merchandise or goods deposited, in the warehouse that issues them, granting the holder the domain of the merchandise or effects that it protects, being released through the delivery of the title, they are issued by legal entities, as long as they comply with the legal regulations and the established requirements, they serve to satisfy short-term needs such as working capital, through liquidity obtained by financing, its guarantee is given back for goods or merchandise owned by the company, to which they are free of encumbrance, belonging to the same genus, species nature or type, they are insured against ordinary risks of storage, their deposit must be made in authorized or official warehouses, the term must not reach 180 days, their The value is set by the issuer, they can be acquired by individuals or legal entities, Mexican foreigners, their custody is INDreview, both the certificate of deposit and the bonds of garment.

D) CERTIFICATES OF REAL ESTATE PARTICIPATION (CPIS).
They are registered credit titles, issued by a fiduciary institution, which entitle an aliquot part of the ownership to come from the real estate pledged as collateral. It is issued by a multiple banking institution, it serves for long-term financing of the issuing company, using real estate of the company as collateral, with a minimum term of three years, with quarterly payments and a single amortization at maturity, its nominal value is $ 10 or its multiples, they can be acquired by natural or legal persons, Mexican or foreign, their custody is by INDreview.

E) ISSUE OF OBLIGATIONS.
They are registered credit titles that represent a collective credit, issued by legal entities, they are medium and long-term financing for acquire fixed assets or finance investment projects, its term is from three to seven years, with a maximum grace period equal to half the term total, its nominal value is $ 10 or its multiples, they can be: unsecured without specific guarantee, mortgages with security of movable property and guaranteed by any credit institution, their custody corresponds to INDreview and they can be acquired by individuals or legal entities, national or foreign.

FINANCIAL FACTORING

Recourse factoring. It consists of a product through which, through the collection rights session of the current accounts receivable, documented in Credit titles, invoices, against receipts, etc., a high percentage of the value of the operation is anticipated, discounting a charge on the value of the advance, and a fee on 100% of the operation for administration, custody and management of collection. In the case of overdue factoring, the financial charge is covered by the client on a monthly basis and on schedule, at the beginning of the operation.

Requirements:
1.-Companies with a minimum of two years old.
2.-It is required to sign a factoring contract with recourse, and sign a promissory note to the order of the factor.
3.-If it is a thin collection, a commercial commission contract is required.
4.-the client in headquarters only role of buyers, previously authorized.
5.-the client must deliver the documents, in which it appears in the credit rights that are going to be the object of the transmission.

Pure factoring. It is a product through which the factor purchases the total risk of the operation, anticipating the client the total value of their documents less the financial charge, fee and capacity, if applicable.

In this type of factoring, the financial charge is higher, since the factor acquires the total risk, by regular advance and with direct collection.

Requirements:
1.-it is necessary to sign a factoring contract without recourse.
2.-this product is aimed solely at the corporate segment.
3.-operations documented in promissory note.
4.-the client must deliver the documents in which the credit rights are recorded, which will be the object of the transfer.

Capacity. It is a reservation percentage, which is determined based on the volume of returns and rebates. It generally varies from 10 to 30%.

FINANCIAL LEASE AND I WILL PAY

It is another source of financing and they can be of two types:

-Pure leasing. It is the contract by which a natural or legal person (landlord) is obliged to grant the use and enjoyment of an asset to another natural or legal person (lessee), who in turn in consideration must make an agreed payment for a certain pre-established period, either in cash, in goods, in credit or in services. This type of lease only grants temporary use or enjoyment.

-Financial leasing. Contract by means of which, one of the parties (lessor) is obliged, when financing the acquisition of a movable or immovable property, during a previously agreed and irrevocable term for both parties, who are part of the fixed assets of another natural person or moral. The other party (lessee) is obliged to pay the amounts stipulated in the contract for rents.

At the end of the agreed term, the lessee must exercise any of the following options:
a) transfer ownership of the property that is the object of the contract, by paying a specified amount that must be less than the market value of the property at the time of exercising the option.
b) extend the contract for a certain period, during which the payments will be for an amount lower than that established during the initial period of the contract.
c) Obtain part of the price for the sale to a third party of the good object of the contract.

PROMISSORY NOTES

This type of credit is negotiated with credit institutions. They are strictly short-term financing instruments (30, 60 and 90 days), and their application is focused on the satisfaction of eventual resource needs due to operations or special situations, different from the normal operation of the company. However, countless companies use direct credits as a financing option for their normal (sometimes chronic) needs for lack of working capital (liquidity), given that by not having to structure contracts to be awarded, obtaining them is relatively quick and simple.
This financing tool is also known as unsecured credits or loans, since credit titles (promissory notes) are issued, in which the only Payment guarantee is the signature of the debtor of the document and, occasionally, the signing of a guarantee, which is usually the personal guarantee of the owner, director or manager of the company station.

Bibliography:
Jeff Madura, International financial administration, 6th. edition, editorial Thompson editores, Mexico.