Borrowed funds (capital) are involved to finance investment projects in a case of lack of own funds.
Amounts of borrowed funds often greatly exceed the amount of own funds.
Advantages and disadvantages of the financing of investment projects with borrowed funds:
Credits - the most common way to attract borrowed capital. Credit is issued in case of compliance with the basic principles of lending: recoverability, urgency, serviceability, security, intended usage.
Recoverability suggests that passed in debt values in agreed in advance writing form (loan agreement) will be returned to the seller of credit (the creditor). As a rule, the credits are returned in equal parts, starting from the specified period of time until to the date of full repayment of obligations. An exception is the case of annuity payments.
Annuity payments - periodic payments of a constant amount, that include the amount of the repayment of a part of a principal debt and the fee (percentage) for the loan. Herewith, redeemable at different periods amounts of debt and percentages are different.
Urgency of lending means that the loan must not only be returned, but returned in a strictly stipulated in the loan agreement term. To do this in the loan agreement is developed in detail the schedule of repayment of the loan and interest payments.
The principle of payment of the loan means that the borrower must make a certain money a fee for using a credit or pay for a specified period of time.
Security of a loan - the principle of lending bail (security) of specified in the loan agreement of tangibles assets and other types of support.
The most common types of security of a loan are:
The principle of intended usage involves the issuance of a loan for a clear goal, which is stipulated in the loan agreement (for the purchase of equipment, purchase of raw materials, etc.).
Types of credits
Commercial credit - a loan granted in the form of commodities by sellers to buyers in a form of deferred payment for sold goods. It is provided under the obligations of the debtor (buyer) to repay in a certain period of time as the principal amount, and accrued interest.
The use of commercial credit requires the manufacturer to have a sufficient reserve capital in case of delay of receipts from debtors.
Commercial credit is used only to finance a part of the working capital in a form of material stocks.
Bank loan - a loan provided by credit institutions, most of all by banks in a monetary form under the loan interest. Bank loans are granted for a period of a few days (short range in a form of overdraft), a few months (short-term) from one year to 3-5 years (medium), and from 6 years or more (long-term). Accordingly, the short-term are used to finance the working capital projects, medium - to finance the capital investments in fixed assets of inexpensive projects, long-term - in large and expensive projects.
Investment credit - a type of bank loan (usually long), directed to the investment purposes. Investment loan has certain differences from other credit transactions, including the specifics of the loan, longer period of granting and high level of risk.
Mortgage loan - is a long-term loan for real estate investments, the repayment of which is guaranteed by transfer of rights on a property from borrower to a lender as collateral for cash loans. Mortgage loans are provided by commercial banks, non-bank credit institutions (investment funds and others).
Corporate bonds - documented investments made in the enterprises of different type of ownership in order to receive from the issuers of specified forms (and sizes) of incomes and repayment (return) of the amounts advanced earlier by a certain date.
Corporate bonds are a household name price (face value) and the market price. The nominal cost of a bond represents the amount that is taken on loan and is a subject to return after expiration of the period of its maturity. Nominal price is the base value for the calculation of revenue bonds.
Since their issuance and maturity, they are bought and sold according to the established market prices. The market price at the time of placing the bond may be below nominal, equal to nominal and above the nominal.
The main types of bonds are short-term discount bonds and long-term coupon bonds.
On discount (zero-coupon) bonds the income of investor is a discount, i.e. discount from the nominal value. Discount bonds are sold at a price below nominal. But the closer is the date of maturity of the bond, the higher is the market price of the bond.
Coupon bond - a bond according to which the owner is paid not only a nominal value at the moment of bond's maturity, but a periodical coupon interest. For example, a fixed percentage according to the coupon can be paid once a month, once a quarter, once a year.
Coupon bonds trade in the securities market may be made at a price below their nominal, at nominal and at a price higher than nominal (usually if the coupon income exceeds market interest rates on loans).
Legal bases of a procedure for issuance of corporate bonds in Russia are established by the Federal Law of 22 April 1996 N 39-FZ "On the Securities Market" as amended, entered into force (see legal frameworks, such as the Federal Law of 22 April 1996 , N 39-FZ "On the Securities Market").At the current stage of the securities market development, access to the cheap funds of boned loans for financing of current activity and long-term investment projects have only a large and successful companies (such as OAO "Gazprom", "Elektrosvyaz" and others). Unknown on the market, companies can attract money with issued bonds only under a large percentage (discount), greater than rates on bank loans.
Means of organizations and individuals in the loan
To reduce the investment risks of the project, owners (founders of the legal entity) can finance the investment project with their own funds through loans. This is differs from making their own funds into the company's authorized capital. In order to finance the project in the form of loans, cash may be involved or other valuables and from other people.
Loan agreements are concluded in writing form and contain the same conditions as the credit agreements. However, the mandatory for bank credits principles are optional in the loan. Loans may be granted for an indefinite period, free of charge, i.e., without payment of loan interest, without provision of collateral.
The economic essence of loans does not differ essentially from bank loans.
Issuance of own promissory notes
Issuance of own promissory notes, not of equity securities (stocks, bonds) is much simpler and legally and procedurally. Bills, although they are debt securities as discount bonds, but it is not required to register their production in accordance with the law "On the Securities Market".
The next stage after the issuance of promissory notes - their selling in the stock (bill) market. To attract the resources on this market can only the investment company, which is not only active on this market and has its own financial resources, but also is a payee of a number of companies. In terms of availability to finance investment projects of companies, the paper credits (receiving of cash under the issued bills) not much differ from bonded loans.
Financial leasing – an operation connected with the special acquisition of property to the ownership and subsequent renting of it into the temporary possession and usage for a period approaching by the duration to a lifetime and amortization of a whole cost or major part of the property value. During the term of the contract, the lessor at the expense of the lease payments returns to himself full value of the property and receives profit from financial transaction. In general, financial leasing can be considered as a form of long-term loans.
The subject of lease can be any non-consumable items, including enterprises and other property complexes, buildings, structures, equipment, vehicles and other movable and immovable property, which can be used for business activity.
Subjects of lease can not be lands and other natural objects, as well as property, which is prohibited by the federal laws for free circulation or for which a special procedure of circulation is established.
The main advantage of financial leasing against the loan – absence of a requirement to ensure the deal with pledge of property. Insurance is the subject of leasing by itself, i.e. equipment, or car, or real estate.
Financial leasing is a tripartite nature of the relationship. At the request of the lessee, the lessor purchases from the provider equipment (car, real estate) and passes it to the lessee, fully reimbursing his financial costs through the appropriate lease payments.
The basic features of financial leasing:
Regulated by the Federal Law of 29 October 1998 No 164-FZ "On finance leases (leasing)", as amended, the civil law and the lease agreement.