The fact that financing has become a decisive factor – example of loans

Competition for market shares

Competition for market shares

Financing models are an important basis for deciding on lending or investments. Faulty financing models, on the other hand, can have devastating effects. In particular, the increasing competition for market shares and internal and external growth are increasingly leading to the fact that financing has become a decisive factor for corporate development. As a result, more and more companies are required not only to make their financing more flexible in terms of taxation, but also to keep an eye on the alternative forms of financing available. Nowadays, modern companies not only have to deliberately involve their respective financing partners in the financing. They are also encouraged to actively shape their financing structure due to the changing framework conditions at the credit institutions and the ever more diverse range of financing products.

Management and investors need information quickly and reliably, especially in times of crisis. This information affects not only the strategic and operational area, but also the financial condition of the entire company. In addition to improving the earnings situation, the operational restructuring also aims to ensure the short-term viability of a crisis company. In order to develop a corresponding individual financing concept, an exact illustration of how the company is strategically oriented is required. All activities are to be transferred into a so-called financing concept. It is important not only to ensure that financing is tailored to requirements, but also to minimize financing costs accordingly. However, this is only possible if all those involved can also assess the advantageousness of the individual investment projects from a financial perspective.

Competing investment measures

Competing investment measures

In order to be able to choose between competing investment measures, the desired degree of entrepreneurial freedom must be taken into account in addition to the required flexibility. In order to optimize the whole thing accordingly, a mix of equity and debt capital with the selection of suitable instruments and partners with a view to minimizing costs is necessary. All tax aspects must also be taken into account – also with regard to the rating. This in turn presupposes that the participants learn to assess how long investments should be used or when an old system should be replaced by a new one. The participants should also ensure that they are able to determine the capital requirements to ensure sufficient liquidity. In addition to the various instruments, it must be possible to assess the corresponding structuring within a capital procurement.

Whether project financing, lending, capital procurement or company valuation – without solid planning and model calculation, financial decisions quickly become a risk for the company. Everyone knows that, but there are many problems in controlling practice. This requires advice that is independent of the individual financing products.

Concept of funding

Concept of funding

The term financing has evolved over time from a relatively narrow term to a very comprehensive term. First of all, financing in the narrowest sense meant raising capital by issuing securities. Finally, the term financing extended to capital repayment (interest and dividend payment) and capital redistribution (capital structure: ratio of equity to debt). Today, financing also means designing current and potential cash flows to meet the company’s capital needs. Financing therefore includes all measures that serve to supply a company with capital and its optimal structuring.

The types of financing can be broken down by source of funds and capital liability. Internal financing can be assumed if the funds were generated within a company itself as part of the operational sales process. One speaks of external financing if the funds come from the capital market (i.e. from outside). In this context, it does not matter whether the inflow is equity or debt. Self-financing in the form of equity financing or deposit financing is available if the financial resources are raised by the previous or the new owner. If, on the other hand, the lenders assume a creditor position vis-à-vis a company, this is referred to as credit or debt financing.

The duration of funding is also an extremely important classification criterion, which should not be underestimated. In this way, the types of financing can be divided into short, medium and long term. One speaks of short-term financing if there is a term of up to one year. Maturities between one year and up to four years already fall into the “medium-term financing” area. Anything above that is always long-term financing.

However, only very few participants know that financing can also be differentiated according to frequency. Those who do not pay attention to this point quickly end up in the “offside”, because the overview is quickly lost here and one loan ultimately only replaces the other.

The division by frequency

The division by frequency

From these explanations it can be seen that – similar to loans or other financial products and services – a loan is not immediately a loan. Rather, a distinction must be made between different types. A distinctive feature is the respective target group classification, example: civil servant or student loans. Distinctions must also be made according to the origin. For example, completely different rules apply to an employer loan than to a building society loan. In addition, it must also be characterized according to the intended use. Example: real estate loan. Ultimately, the loan types are also differentiated according to the respective conditions. These conditions are agreed accordingly for payments or repayments within the loan contract. The best known are the annuity and fixed-rate loans.