What Are the Different Methods of Financing Economic Development?

The financing method refers to the specific form of financing of an enterprise. More financing means more financing opportunities for companies to choose from. If an enterprise can not only obtain commercial credit and bank credit, but also directly finance by issuing stocks and bonds, and can also use discounts, leases, compensation trade and other methods of financing, it means that the company has more opportunities to raise Funds required for production and operation. ^[1]

Financing

The financing method refers to the specific form of financing of an enterprise. More financing means more financing opportunities for companies to choose from. If an enterprise can not only obtain commercial credit and bank credit, but also directly finance by issuing stocks and bonds, and can also use discounts, leases, compensation trade and other methods of financing, it means that the company has more opportunities to raise Funds required for production and operation. ^[1]

In a narrow sense, financing is a business

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1. Follow the ordering theory of "internal financing" followed by "external financing"

In the market economy, corporate financing methods can be divided into two types in general. One is endogenous financing, that is, the process of converting the company's remaining income and depreciation into investment; the other is external financing, which absorbs other The process of transforming the savings of economic entities into their own investments. We clearly understand that in the process of enterprise progress and the expansion of production scale, it is difficult to meet the capital needs of enterprises by relying solely on internal source financing, and enterprises rely on external source financing to a large extent. Endogenous financing funds are produced inside the enterprise, and no actual external payment of interest or dividends is required, which will not reduce the company's cash flow; no financing costs are required, making the cost of internal financing much lower than external financing, which can effectively control finance Risk, maintaining a sound financial position. Therefore, it is the preferred financing method for enterprises. The size of an enterprise's internal financing capacity depends on factors such as the company's profit level, net asset size, and investor expectations. Only when internal financing cannot meet the company's funding needs will the company turn to external financing.

Due to the impact of different financing environments on a company's external financing, the financing methods it chooses are also different. But you can follow the order of choosing low-risk debt financing and then issuing new stocks. The reasons for choosing financing methods in this order are:

(1) Increasing the debt ratio, especially the high-risk debt ratio, will increase the financial risk and bankruptcy risk of the enterprise.

(2) Corporate equity financing preferences tend to reduce the efficiency of capital use. Some companies will invest equity funds raised in projects that they are not familiar with and whose investment yield is not high. Some listed companies even change the funds on their prospectus at will. Use, and does not guarantee the profitability of the funds used after the change of use. Under the prospect that the company's operating performance has not been greatly improved, the new equity financing will dilute the company's operating performance, reduce earnings per share, and harm investors' interests. In addition, as China s capital market system construction continues to improve, the threshold for corporate equity refinancing will increase, and refinancing costs will increase.

The financing sequence of most listed companies in China is to give top priority to stock issuance, followed by debt financing, and finally internal financing. This financing sequence tends to cause inefficient use of funds, weakening financial leverage, and propelling the tendency of equity financing preferences.

2. Consider the actual situation and choose the appropriate financing method

Enterprises should choose a more appropriate financing method based on their own operating and financial conditions, and considering changes in macroeconomic policies.

(1) Consider the impact of the economic environment. The economic environment refers to the macroeconomic conditions of financial activities of enterprises. In a period of rapid economic growth, in order to keep up with the rate of economic growth, enterprises need to raise funds to increase fixed assets, inventory, and personnel. , Issuing bonds or borrowing from banks and other financing methods to obtain the required funds. When the economic growth rate begins to slow down, corporate demand for funds decreases. Generally, the scale of debt financing should be gradually reduced, and debt financing methods should be minimized.

(2) Consider the capital cost of financing. The cost of capital refers to the cost incurred by an enterprise to raise and use funds. The lower the financing cost, the better the financing income. Because different financing methods have different funding costs, in order to obtain the required funds at a lower financing cost, companies should naturally analyze and compare the funding costs of various financing methods, and try to choose the financing method and financing combination with low funding costs.

(3) Consider the risks of financing methods. The risks of different financing methods are different. Generally speaking, debt financing methods require regular repayment of principal and interest. Therefore, there may be risks of insolvency and financing risks are greater. The equity financing method has low financing risk because there is no risk of repayment of principal and interest. If a company adopts debt financing, due to the effect of financial leverage, once the company's EBIT falls, the after-tax profit and earnings per share fall faster, which brings financial risks to the company, and may even lead to bankruptcy. risks of. The successive bankruptcies of several major investment banks in the United States are related to the risk control of abusing financial leverage and ignoring financing methods. Therefore, companies must choose a suitable financing method according to their own specific circumstances and considering the degree of risk of the financing method.

(4) Consider the profitability and development prospects of the company. In general, the stronger a company's profitability, the better its financial position, the stronger its ability to realise, and the better its development prospects, the more capable it will be to bear financial risks. When the investment profit rate of an enterprise is greater than the interest rate of debt funds, the more liabilities, the higher the company's return on net assets, and the more beneficial it is to the development of the enterprise and the owner of equity capital. Therefore, when enterprises are in a period of rising profitability and good development prospects, debt financing is a good choice. And when the profitability of the company continues to decline, the financial situation is deteriorating, and the period of poor development prospects, companies should use debt financing as little as possible to avoid financial risks. Of course, if a company with strong profitability and the ability to expand its equity has the conditions to raise funds by issuing new or additional shares, it can raise funds using equity financing or both equity financing and debt financing.

(5) Consider the degree of competition in the industry in which the company operates. When the industry in which the company operates is fiercely competitive, and it is relatively easy to enter and exit the industry, and the profitability of the entire industry is declining, you should consider using equity financing and use debt financing carefully. When the industry in which the company operates is less competitive and it is more difficult to enter and exit the industry, and when the company's sales profits can grow rapidly in the next few years, it can consider increasing the debt ratio to obtain financial leverage benefits.

(6) Consider the control of the enterprise. In the financing of small and medium-sized enterprises, corporate ownership and control are often lost, which leads to profit diversion and damage to corporate interests. For example: mortgage of real estate certificate, disclosure of patent technology, investment conversion, exposure of important upstream and downstream customers, and clear internal privacy of the company will all affect the stability and development of the company. On the premise of ensuring that the company has considerable control, it must not only achieve the financing purpose of SMEs, but also orderly transfer ownership. Issuing common stock will dilute the control of the enterprise and may cause control to pass to others, and debt financing generally does not affect or rarely affect control.