What is financing?

We explain what financing or financing is, what types exist and what are its sources. In addition, the financing of a company.

1. What is financing?

Financing or financing is the process of making viable and maintaining a specific project , business or venture , through the allocation of capital resources (money or credit) for it. To put it more easily, financing means allocating capital resources to a given initiative.

Financing is a key element in the success of any project or company , since it involves the resources that will be needed to implement it. Every project requires, in one way or another, a certain margin of funding.

For example, in the case of initiatives that will then be able to generate their own financing, this is the initial push that will put the productive wheel up. In other cases it is the support of an initiative that, otherwise, could not achieve its objectives , such as scientific research , for example.

Generally, matters related to financing are of interest to the financial and accounting departments of the companies, or to the administration of other projects. Depending on the way it is financed, an enterprise will have greater or lesser freedom, and more or less time to reach the goals initially proposed.

2. Types of financing

There are many types of financing, and many ways to access them. In principle, we will distinguish between two forms of financing according to who provides the requested money :

• Own or internal financing . The one that comes from the same participants in the project or company, that is, from within the organization: from its investors, owners or shareholders, or from the fruit of its own profits or lucrative activities.
• Third party or external financing . The one that comes from foreign entities to the project or the company, that is, that is assigned by other companies, individuals or institutions and that often requires some type of validation, consideration or indebtedness.

Another possible way to classify financing is according to the duration of the financing , as follows:

• Short term financing . When it is the result of arrangements that expect to receive results (dividends, findings or the return of money) in short terms (less than one year).
• Long term financing . When it is the result of arrangements that do not expect short-term results, but in greater periods (greater than one year), or there is no obligation to return, but are selfless contributions to sustain the initiative over time.

3. Funding sources

Next, we will detail the main ways of obtaining financing that exist, especially those that depend on third parties (external financing):

• Credits . They are forms of indebtedness, payable in different periods of time and with different margins of interest . They are usually granted by a financial organization ( banks , lenders, etc.), although they can also be granted by public institutions, usually in more benevolent terms. Mortgages, bonds, promissory notes and lines of credit are examples of this.
• Incorporation of investors . Many initiatives can find financing by opening their equipment to the entry of new elements, whether they are new shareholders (that is, selling shares of the company) or new sponsors (to whom they offer advertising or recognition for corporate social responsibility work in return ).
• Informal loans . Similar in nature to credits, but granted in less formal terms, they may come from a friend, a relative, a lender or something similar.
• Liquidation of goods or services . In the event that the company or the enterprise possesses goods to sell or services to provide, it can try to finance itself by offering them, as long as this does not prevent it from continuing existence, or denaturalize the project itself. The sale of advertising spaces, for example, can be a way to self-finance a project that has massive exposure.

4. Financing of a company

Commercial companies are initiatives that often require constant investments and intelligent management of their sources of financing.

Large companies have shareholders , for example, who are partial investors who receive a periodic allocation of money from the dividends generated by the company, depending on how many shares they own. Thus, large investors or majority shareholders receive more than the owners of a few shares.

The shares are participation fees , that is, a form of continued debt, which gives shareholders a greater or lesser right to voice and vote in the conduct of the company.

Instead of shareholders, other companies operate based on their own capital , that is, their sole owner. They can choose to refinance, in case their lucrative activities do not cover their operating expenses, through credits or loans.

However, if necessary, these companies may also decide to open up to the investment of third parties: that other individuals or that other companies buy shares within it, thus giving part of their autonomy to the new capitalist partners.