Funding

The financing, and financial economics, is one of the three parts of the financial sector and includes all operational processes for the provision and repayment of financial resources needed for investment. This includes all activities from procurement to repayment of financial resources and the related design of payment, information, co-determination, control and security relations between companies and investors. The financial economics also includes the reversal of approach these issues from the standpoint of the investor ( financial planning).

• 2.2.1 Self-financing
• 2.2.2 Leverage
• 2.2.3 Full or partial funding
• 2.2.4 Special forms: leasing, factoring, mezzanine capital, forderungsbesichertes securities

• 4.1 Vertical financing rule
• 4.2 Horizontal financing rule

• 6.1 Capital Requirements Planning
• 6.2 Liquidity Planning

History

Initially we looked under the keyword financing only raise capital by issuing securities. Later, the term was extended to include the repayment of capital and reallocation to a comprehensive " supply of a company with capital."

Breakdown of financing

The forms of financing can be broken down by source of funds ( outside financing or internal financing) and at the same time as to the legal position of the investor ( equity investors or lenders ), so that a two-by- two matrix gives:

• Foreign -financed leverage = debt financing
• Foreign -financed self-financing equity financing =
• Inside Funded = self-financing self-financing
• Inside Funded debt financing = funding from reserves

Internal financing

Internal financing is a financing through reinvestment ( retention ) of past profits. For this, two conditions must be met:

• The company will receive cash from the in-house sales and service process to
• The cash is against no or a lesser payout effective effort.

A measure of the internal financing potential is the cash flow measure that simplifies the excess payment.

Self-financing

Also in this issue is separated between two possible financing sub-items:

• Open self-financing: retained earnings: Formation of Retained Earnings
• Covert self-financing (silent self-financing ): release of hidden reserves

In the open self-financing reported earnings will be retained either in full or part. Will they all be retained waive the shareholders on their profits, whereas corporations may only retain part. If the profits distributed and at the same time carried out a capital increase by the amount of profit that can - saves tax - depending on the control system. This situation is also known as "pay-out - recapture " method.

The hidden or silent self-financing is possible in two ways: first, by the application of mandatory profit determination rules (such as depreciation, provisions ) and secondly by the use of margins offered by the accounting system underlying. Hidden reserves resulting from the prudence principle and the application of valuation and accounting options and are partly illegal:

• Overvaluation of liabilities
• Undervaluation of assets ( tempered lower of cost and maintenance of voting rights ) Non-recognition of assets by taking advantage of an accounting policy choice (for example, non-activation of low-value assets )
• Lower approach of assets (for example, high rates of depreciation, any special depreciation)
• Omission of attributions ( for example, cost / cost - ceiling on the balance sheet ).

The self-financing applies in some situations be advantageous since they can be saved through taxes, it increases the resilience of a company and through lack of interest payments a riskier business strategy can be forced. At the same time as well as capital may not be optimally used and compared to market alternatives they might be relatively " expensive " (possible costs due to lack of profits in financial assets).

Financing accruals, depreciation and amortization

To avoid misunderstanding, is pre- emphasized that accruals, depreciation and amortization in the statement of cash flows act as " inflow " of cash. However, this is the only reason why the case as to provisions and depreciation as an expense, which have reduced the profit after tax the starting size of the cash flow statement. Since these expenses are not connected to the outflow of cash and cash equivalents, the result is corrected after tax by these two items be added back again. Nevertheless, accruals, depreciation and amortization for the following reasons act as financing:

Through the creation of provisions, financial resources are tied to a company, as the additions to provisions reduce net income, so less funds for payments ( cash outflows ) are available. The crucial factor is the maturity of the provision, since only long-term provisions have sufficient financing effect. They are also referred to as internal debt financing.

Of great importance in this context are pension provisions, particularly in the phase of new commitments. They have by their extraordinary longevity almost in the nature of equity from the company's perspective; the view of many external analysts (at least from the perspective of rating agencies ), but they are in fact treated as debt.

Funding from depreciation recoveries is principally based on savings withdrawals, since the purchase of the capital goods and possibly the payout associated are done in an earlier period. For a financing effect occurs, the write-off counter values ​​must be the company accrued as deposits.

If the back -flowing funds are not needed for replacement, so this is called a capital release effect. If the free agent immediately reinvested in assets of the same type and the same acquisition or production costs, it follows the capacity expansion effect.

Restructuring and refinancing

Rebalancing the asset range occur when tangible and / or intangible assets are transferred into liquid form. One speaks in this context of substitution financing. This shift is mainly through the sales process.

Refinancing is the transition of positions of the assets and / or capital side, without changing the resources available.

External financing

External financing referred financing transactions in which the Company funds will be supplied from the outside, ie which do not originate from the production process and the company. The entrepreneur or the owner or the shareholders have the opportunity to supply the company equity. For this purpose, deposits are made, where it is called self-financing or equity financing. However, the company may also finance through loans (through debt), which is referred to as debt financing.

Self-financing

Self-financing referred to processes in which the company additional equity will be provided, ie in which the shareholders (owners) of the company perform agent. It is also known as "Investment and deposit funding ." The supply of equity can be done by increasing the deposit or by admission of new partners, which bring new deposits. Also self-financing part of the self-financing. Here, since the capital but comes from "inside", ie from the business process, the self-financing is a part of internal financing. The self-financing is a subpart of both the external and internal financing.

Here, between emissive ( Aktiengesellschaft, KGaA ) and non- emissive companies ( general partnership, limited liability company, limited partnership, cooperative) is distinguished. The latter do not have the opportunity to participate in the stock market their securities ( shares) issue and to apply such high amounts of equity. Composed especially for the investor the disadvantage here in the low marketability of the shares, so they have to bind the longer term.

Instead, the shareholder must either inject new capital (limited only possible because of limited personal assets ) record or a new shareholder. But if a new shareholder be included, the existing distribution of voting rights change. Depending on the form of liability it has been made to the company by the legislature vary easy to get to new capital. This ranges from the simple case of a new limited partners up to the admission of a new partner in the GmbH.

Debt financing

As debt financing all operations are referred to by the company with debt is provided. Debt financing refers generally be financed by loans, which are the capital flows from the outside by lenders in the business. In case of external financing, a distinction is full and partial funding, depending on how high is the proportion of debt financing in the total financing amount. Due to lack of participation rights and participation in the profit / loss for the lender, interest will be paid for in return. This usually includes the risk-free market interest rate plus an appropriate risk premium, which depends on the level of collateral and estimated risk. In addition, the borrower must repay the loan even in case of loss. Is it not possible, the security that the lender has mostly demanded in the contract will be handed over to the lender.

Loans are usually distinguished according to their duration:

• Long-term loans: loan
• Bonds
• Convertible bonds, bonds with warrants
• Promissory notes

• Supplier credit
• Customer credit
• Overdraft
• Change
• Discount credit
• Lombard loans
• Rembourskredit
• Bankaval

Full or partial funding

After the amount of the share of debt financing to total financing is referred to as full or partial funding. In the full funding of the borrower is no equity and is thus a higher financing risk, while he participated in the partial financing with an equity ratio.

Special shapes: leasing, factoring, mezzanine capital, forderungsbesichertes securities

See also: leasing, mezzanine capital

Factoring is basically a form of outsourcing. The demands of a company or a section of it to be sold to the factoring company and in return you get the immediate payment of the purchase price. Most 90 percent shall advance. The remaining 10 percent will be paid when the customer pays the invoice or becomes insolvent. Factoring is a " true sale " that is, the factoring company is the owner of the claim and therefore also has the risk of default.

Be differences

• The " in- process " ( debtor management is continued by the seller of the receivables itself) and
• The " full-service " method ( the receivables management is taken over by Factor).

Furthermore, there is the

• "Silent method " ( the sale of receivables is against the debtor not disclosed; each time in connection with the in-house method and only with good credit ratings ) and the
• "Open method " ( the sale of receivables is the customer displayed).

A special case is the maturity factoring that hedges the exposures to 100 percent failures, but no funding has function.

Benefits of Factoring:

• Conservation of liquidity
• No credit risk
• Cost savings on staff and service level
• Time savings
• Professionalization of the accounts receivable management ( for smaller companies )
• Improvement of corporate ratings, primarily through reduction in total assets and resulting higher equity ratio
• Broadening the funding base and optionally greater independence from the / the bank (s).

Disadvantage:

• High costs by factoring company, which rolls a portion of the risk on the price on the factoring clients.

Refinancing with asset-backed securities similar to the sale of receivables by factoring. Here, the claims ( assets) not assigned to a factor, but to a specially established purchasing company Special Purpose Vehicle ( SPV ) to be sold, securitized them and as asset-backed securities (ABS) and asset-backed commercial paper ( ABCP ) placed on the capital market. Buyers of these securities are institutional investors such as banks, insurance companies or funds. To reduce the risk of failure of investors who are widely backed securities issued ( credit enhancement, mainly due to backing with tranches that bear the first loss - subordination - or by credit insurance of underlying exposures ). In addition, the risk of default or loss of papers by rating agencies (mainly Standard & Poor's, Moody's or Fitch Ratings ) shall be assessed. Due to the high minimum volume of ABS are particularly suitable for large enterprises, while the refinancing is open through ABCP (due to the pooling of multiple sellers of receivables receivables ) and medium-sized companies.

Special Financing

A special financing is a financing tool that for a specific purpose (transaction ) is created and is thus bound to this purpose. Here is the structure of this financing an SPV (Special Purpose Vehicle or Special Purpose Entity, SPV / SPE). Only the requirements of this acquisition are held as financial assets. The receivables will be repaid from the proceeds from these assets.

This financing instrument is falsely attributed because of its absenten awareness and often a lack of knowledge in the field of " corporate finance " the " gray capital market ". Moreover, predominantly larger, mostly institutional and international corporations offer this form of financing. This territorial and knowledge-based distance to this form of financing provides increased skepticism, the opposite is an enormous need for security, as with any other financial instrument.

It is a completely legal form of financing that is mostly used due to its principle of operation of local banks in the area of ​​real estate finance. In the corporate funding of this financing tool is still far too little attention, especially as the conditions for financing needs above the one - million - euro mark due to the risk and capital nature of this form of financing is ideal for complementary financing by the economic and business rules.

Funding rules

Main article: funding rules

Depending on the position in the balance of factors used in the calculations, the funding rules are divided into horizontal and vertical:

Vertical funding rule

• One-to -one rule

Horizontal financing rule

• Golden rule of banking ( asset coverage I )

• Golden rule of financing ( assets ratio II)

Balance Sheet Analysis

In contrast to financial planning ( vision of the company) the perspective of equity holders or creditors / lenders is assumed in the analysis of financial securities or securities analysis. On the basis of balance sheet financial ratios can be determined in order to assess the credit risk of debt financing from the perspective of the creditor or to obtain from the perspective of equity Notes to the financial position of the company. Essentially it, there are four indicators that are systematically discriminated by two approaches:

Traditional approaches

• Technical analysis
• Fundamental analysis

Modern approaches

• Individual portfolio theory
• Pricing of risky securities in the financial markets (Capital Asset Pricing Model)

A high debt ratio or a low equity ratios often mean an increased risk, because if an insolvency are not, or not fully covered by collateral loans may fail partially. The debt ratio indicates the ratio of debt to equity and thus rated the same as the two financial ratios.

Inherent weaknesses of financial statement analysis is the lack of information about market position, potential and quality of management, since the balance sheet as date overview provides little information about the future position of the company and hardly says something about the past successes or problems of corporate governance in the market.

Financial Planning

The main task of financial planning is to maintain the liquidity under the condition of maximizing profitability, ie the cost of capital minimization. Consequently, a dynamic equilibrium between all future cash inflows and outflows must prevail. The insolvency threatens, even in cases when the balance is disturbed in an infinitely small pay period, they should not through immediate action ( extra cash) can be solved.

On the financial planning four demands.

Possible liquidity conditions:

• About Liquidity: imputed interest income loss due to lack of
• Liquidity: insolvency

In order to reduce excess liquidity, investments can be made, debts repaid or distributions are made to the equity investors. Liquidity can be offset by additional external sources of capital (loans, capital increases ), in-house using deletions of expenditure and better enforcement of the terms of payment.

Financial planning can be divided into two categories according to maturity:

Capital requirements planning

The capital requirements planning extends over a forecast period of several years. Is planned for years and as a unit of the balance sheet items are used.

Liquidity planning

This is based on cash flow, and can be further subdivided.

Economic impact of financing decisions

If all capital requiring economic agents the capital giving economic agents faced, so it is of national economic interest, that the transfer of the capital to the capital demanders with minimal friction losses accompanied by the capital providers to ensure that the scarce resource " capital " is allocated where it the greatest overall economic benefits generated. By minimizing the transaction costs by, for example, more efficient financing options on exchanges ( direct financing ) or banks ( economies of scale of financial intermediaries ), therefore, a welfare gain can be achieved.