Liquidity is one of the characteristics that best define the strength and maneuverability of a company. The difficulties of a business begin when cash is scarce and it is not easy to find ways of financing. One of the biggest problems is always the financing of a company.

Lack of financing, derived especially from credit restrictions, is behind the closure of many businesses, some of them viable with a little more support.


One of the challenges of our economic model is to give solidity to the financing of business projects. At Circulantis, we want to promote new financing solutions for companies with an accessible and transparent online methodology.


The self-employed and SMEs should have the opportunity to defend their business proposal with more alternatives and with the fewest possible limitations.

Article index

- Introduction

- Classification of funding sources

- Sources of funding by source

- Funding sources by the duration

- Types of sources of funding

- own sources of funding

- external funding sources

- alternative sources of funding

- Funding sources for companies newly created




Introduction

We can start by defining what financing is. It is the process of raising funds to develop a business activity. It is the one that supports all the assets that an organization has and comes from different sources.

The different capital inflows are the sources of financing. For a business, the key is to identify the options available and determine the best solutions to cover the budget and balance the cash and balance sheet. To assess the sources of financing of a company it is essential that its cost does not exceed the economic performance of the business, otherwise, the debt would make the project unviable in the medium or long term.

All expenses and investments must be financed in a proportionate manner to ensure solvency and financial stability.

Classification of funding sources

To establish a classification of funding sources there are two fundamental references: the origin of the funds and the length of stay. Sources of internal financing. Mainly, they represent the value of the assets contributed by the partners plus the benefits generated by the activity (financial result for the year). It is about their own funds or self-financing.

An increase in these items implies a greater degree of autonomy by reducing the need for debt.
Despite its advantages, there may be an opportunity cost. An excessive self-financing strategy limits resources and operational capacity. A controlled debt can increase the potential of the company.
Sources of external financing. They come from resources outside the company. They can be enforceable or non-enforceable.

Non-callable: it is capital received for lost funds (public subsidies, donations, and similar resources).

Callable (debt): loans, lines of credit, finance leases, or commercial advances. In this case, it is capital that must be returned and has a financial cost (in the form of interest, commissions, or other contractual obligations). The external financing required must be oriented to obtain a benefit or performance that outweighs the financial cost.

According to its duration: short or long term


Short-term financing sources. They are resources intended for a period of the permanence of less than one year, and within that period they must be amortized. They are dedicated to covering small investments and current expenses. They may be:

Short-term loans or lines of credit.


Financing or discount of commercial assets: the advance of invoices and similar.

For the latter case, at Circulantis we propose the crowd factoring alternative: an innovative, simple and agile commercial discount and invoice advance formula.


Long-term financing sources. The money has a period of the permanence of more than one year. They are often used for large investments with repayment or amortization terms over several years. For example:


Long-term investment loans

Mortgage loans

Long-term financial leases ( renting or leasing ).


Types of funding sources


According to the previous classification, there are different possibilities that companies and professionals can access. The opening process of recent years in the financial field offers new alternatives outside the traditional banking route. But first, let's answer a question: what type of financing do companies need in Spain? Companies need first of all to finance their working capital. That is, they seek short-term liquidity to cover their current payments.
It is clear how important it is for SMEs to be able to access rapid financing in order to function.
For both working capital and investment, these are the financing possibilities that companies have:

Own funding sources


In accounting, balances are the elements of the net worth or non-callable liabilities. In this sense, these are the most outstanding solutions:

Partner contributions


In limited partnerships (the most common among SMEs), partners must make a minimum contribution of 3,000 euros as initial share capital and can make new contributions later.

Profit for the year (profit and loss account)


The profit after tax is clearly a source of its own financing. On the other hand, losses reduce equity and there is a greater risk of having to resort to external debt and increasing the financial imbalance.

Reserves and carryover

Companies must apply a percentage of their profit to constitute a legal reserve, but they can also create voluntary or remnant reserves to have a specific piggy bank when they need it.

Accounting and tax adjustments


Legal adjustments in amortization methods, provisions, or other accounting and tax adjustments can free up funds to deal with difficult times.

Sources of external financing


These capital channels come from third parties, generally financial entities. They are characterized, as we have seen because the money received has a price or financial cost (unless they are grants or non-enforceable liabilities). Of the existing alternatives, these are the most important financial instruments according to the needs to be covered:

Loans or lines of credit:

Loans

They are contracts that formalize the delivery of money by a financial company. The company agrees to return the business loan leads plus accrued interest (interest and commissions) over a specified period: short or long term.


Credit lines

The financial institution makes a limited amount available to its client during a specific period. The company only returns the amount that it has used plus interest.

Business asset management:

A discount of promissory notes for the advance of invoices

The promissory note is a document issued by a customer as a commitment to pay an invoice on a specific date. In order not to wait for the payment date, the entrepreneur can assign the title to a financial company in exchange for receiving the money in advance and thus gain liquidity.
The advance is delivered with the cost of the transaction discounted, without further charges.


The factoring also integrates forfeiting.

The companies assign their client portfolio - all or part of it - to an entity (factor) so that it exercises the collection management and at the same time grants the advance payment of invoices, promissory notes, certifications, or other commercial documents formed.

Its advantage is to convert installment invoices into money practically in cash.


Confirming


It is the reverse mode of factoring. What companies are looking for is for a company to manage the payment of its invoices, confirming the payment to suppliers but with longer terms.


As compensation, the confirming company offers suppliers a discount line that they can access to advance an amount under the conditions set by the finance company.


Forfaiting

It is designed for exporting companies, which can thus discount their commercial effects and collection rights arising from their export operations.


Financial leasing

Renting and leasing

They are similar figures. Companies can access fixed assets for the business (vehicles, computer equipment, etc.) without having to buy it or assume its depreciation.


Only a monthly installment is paid during the agreed term, with a purchase option at the end of the contract. They are favorable modalities because the asset is used during the best period of its useful life and they have tax advantages.


Secondary debt markets

For the expansion projects of the largest SMEs, the Alternative Stock Market (MAB) and the Alternative Fixed Income Market (MARF) have been designed. Stocks, bonds, notes, and other marketable assets can be issued for financing.


Alternative financing sources (P2P loans)

New technologies are developing alternative sources of financing that offer convenience and assistance to business finances.


Today they are an essential complement to reduce bank exposure that has been the main provider of external financing for decades.


They are based on the P2P loan formula (peer to peer: person to person), under the crowdlending modality (crowd: multiple, lending: loans).


It is made up of e-crowd online platforms that channel money from private and professional investors to companies, in the form of collective financing.


They are currently conceived in different forms of loans, for example:

MCA leads

Crowdlending: loans or lines of credit

Crowdfactoring: commercial discount (the modality in which we are specialized in Circulantis)

Equity crowdfunding: investment in the capital of the company in exchange for participating in the business (crowd angel, venture capital ...)

Crowdfactoring is perfect to cover the main need for freelancers and SMEs in Spain: to protect their working capital.


P2P loans still have a long way to go to Spain, but their impact is becoming stronger in the main world economies: the United States and China.


Funding sources for start-ups

The financing of a new company has more complications due to the risk that a project still to be defined represents for financial entities.


The best solutions go through exploiting all the possibilities, internal and external, and taking into account crowdlending as a strategy for the short term.


Own money, family and friends

In the beginning, anything goes to obtain resources: friends, family, or anyone passionate about the project can be encouraged to collaborate. It is about making the most of what the English terminology calls the "FFF": family, friends, and fools.


Some entrepreneurs start by capitalizing on their unemployment benefits, which can bring in a good sum.


Public grants


For start-up companies, there are different initiatives and aids from public administrations to provide non-returnable funds. The problem is that they have restrictions: they are designed to promote certain activities or support more vulnerable entrepreneurs. Furthermore, they may take time to become effective.


Official subsidized loans

Lines of loans and financing for entrepreneurs from the Official Credit Institute (ICO) or ENISA.


Business Angels


They are private investors with knowledge and contacts in different sectors. They are often interested in innovative business initiatives with growth potential. They not only provide capital, but also experience and sponsorship.


Venture capital companies (SCR) or Venture Capital

They are companies specialized in higher-risk business projects, especially in the technological field and start-ups. They are looking for high-yield investments and a quick return.


To sum up, the key to a good financial strategy is to diversify and find the best solution for each need.


Thanks to technology, new possibilities are born that increase accessibility to support all companies, even those with more difficulties.


Collaborative financing democratizes the financial model and opens the doors to greater social commitment when conceiving finances.