10 practical financing methods for private enterprises (recommended to understand)

10 practical financing methods for private enterprises (recommended to understand)

The Law of the People’s Republic of China on Promotion of Small and Medium-Sized Enterprises, which came into effect on January 1, 2003, plays an important role in improving the business environment of small and medium-sized enterprises, promoting the healthy development of small- and medium-sized enterprises, and expanding employment in urban and rural areas. Local banks or non-bank financial institutions have taken many measures to promote the development of SMEs’ financing. Through financial system innovation, they have provided a variety of financing services, and have begun to significantly improve the financing environment of SMEs.

The realization of a well-off society in an all-around way is inseparable from the stability and development of private enterprises. However, problems such as financing difficulties and loan difficulties, which have long been the curse of the growth and development of private enterprises in my country, still seriously restrict the survival and development of private enterprises and become the biggest “bottleneck”. It is necessary to deepen the reform of the financial system and promote solutions from the institutional level. 

It is an important responsibility of financial institutions to innovate financing methods, expand financing channels of private enterprises, and meet the reasonable capital needs of private enterprise development, and it is also a practical obligation of governments at all levels. The financing structure of SMEs shows a cyclical trend with the different life growth cycles of SMEs. At the same time, there are various channels of equity financing and debt financing for SMEs. At different stages of development, the choice of financing methods for SMEs also shows phased characteristics.

There are 55 types of financing methods for small and medium-sized enterprises that have been implemented and innovated in various places. They are listed below for the reference of private entrepreneurs.

1. Internally managed to finance

A form of financing in which a legal person or other organization raises funds from employees through borrowing within the unit for the production and operation of the unit. According to the “priority order theory” in the modern capital structure theory, the first choice for corporate financing is the company’s internal funds, which mainly refers to the retained after-tax profits of the company.

Internal financing costs are relatively low, the risk is minimal, and use is flexible and autonomous. Enterprises that use internal financing as their main financing method can effectively control financial risks and maintain a stable financial position. The main sources of internal financing of enterprises include retained earnings borrowing and internal employee fundraising. Others can also have loans from relatives and friends, shareholder loans, etc., which are generally used in the early stage of business.

Retained income refers to the internal accumulation that the enterprise extracts from the profits realized in the past years or retains in the enterprise. It comes from the net profit realized by the production and operation activities of the enterprise, including the enterprise’s surplus reserve (including statutory reserve fund, discretionary reserve fund) and unpaid reserves. Divide the profit into two parts.

2. Accounts Receivable Financing

It means that the enterprise transfers its accounts receivable to the bank and applies for a loan. The loan amount of the bank is generally 50%~90% of the face value of the accounts receivable. After the enterprise transfers the accounts receivable to the bank, it should issue a transfer to the buyer. notice and demand payment to the financing bank.

In addition, offering a certain cash discount to encourage customers to pay early (the earlier the payment, the greater the payment discount) is also a means of financing.

3. Accounts Payable Financing

A type of commercial credit financing is a financing method often used by production and wholesale enterprises. Accounts payable refers to the debt to the supplier formed by the failure to pay for the goods purchased by the enterprise, that is, a form of commodity transaction in which the seller allows the buyer to pay for the goods within a certain period after the purchase of the goods.

In normative commercial credit behavior, creditors (suppliers) often propose credit policies to debtors (purchasers) to control the term and amount of accounts payable. The credit policy includes the credit period and the purchase discount and discount period for the buyer, such as “2/10, n/30”, which means that if the customer pays within 10 days, he can enjoy a 2% discount on the purchase price, and if the payment is made after 10 days, it is not. Enjoy discounts on purchases, and the maximum commercial credit period for accounts payable is 30 days.

The biggest feature of accounts payable financing is that it is easy to obtain, without the need to go through financing procedures and pay financing costs, and in some cases, it does not bear the cost of capital. The downside is that the term is short and the opportunity cost of forgoing the cash discount is high.

4. Advance payment financing

A type of commercial credit financing. Advance payment for goods refers to the form of credit in which the selling enterprise collects part or all of the price of the goods in advance from the buying enterprise before delivering the goods according to the contract or agreement. It is equivalent to the sales enterprise borrowing a sum of money from the purchasing enterprise first and then paying it off with the goods. Buyer’s Corporate Financing Conditions:

(1) Good operating efficiency and high reputation. (2) A good production plan and sufficient product output are guaranteed. (3) Power, raw materials, fuel, etc. are guaranteed. (4) The quality of the supplied samples is consistent with the product. (5) Real advertising. (6) Both parties should sign a contract to legally protect the legitimate rights and interests of both parties.

5. Corporate credit financing

The bank grants a certain amount of credit line to some enterprises with good operating conditions and reliable credit within a certain period, and the enterprise can recycle within the validity period and the limit. The comprehensive credit line shall be submitted by the enterprise at one time and approved by the bank at one time.

Enterprises can use the loan in installments according to their operating conditions, and borrow and repay at any time. It is very convenient for enterprises to borrow money, and it also saves financing costs. Banks use this method to provide loans, generally to enterprises with industrial and commercial registration, qualified annual inspection, good management, reliable reputation, and long-term cooperative relations with the bank.

6. Credit secured loan

At present, more than 100 cities in the country’s 31 provinces and cities have established SME credit guarantee institutions. Most of these institutions implement the form of membership management, which is a public service, industry self-discipline, and non-profit organization.

The source of the guarantee fund is generally composed of financial appropriations from the local government, membership funds voluntarily paid by members, funds raised by the society, and funds from commercial banks. When a member enterprise borrows from a bank, it can be guaranteed by a small and medium-sized enterprise guarantee institution.

In addition, SMEs can also seek guarantee services from guarantee companies specializing in intermediary services. When the enterprise cannot provide the guarantee measures acceptable to the bank, such as a mortgage, pledge, or third-party credit guarantor, the guarantee company can solve these problems. Because compared with banks, guarantee companies are more flexible in their collateral requirements.

Of course, to protect their interests, the guarantee company often requires the enterprise to provide counter-guarantee measures, and sometimes the guarantee company will send personnel to the enterprise to monitor the flow of funds.

7. Corporate bond financing

Absorb funds by issuing bonds. Like stock financing, bond financing is direct financing. Units that need funds go directly to the market for financing, and there is a direct correspondence between borrowers and lenders. The policy supports the use of corporate bonds, project income bonds, corporate bonds, medium-term notes, etc. to raise investment funds through the bond market.

SMEs have higher bond rates and higher financing costs. Compared with the deposit rate of commercial banks, the bond issuer’s bond interest rate is usually higher than the bank deposit rate of the same period to attract idle funds; The interest rate of financial institution bonds is generally lower than the loan interest rate of the same period, while the interest rate of SME bonds with lower creditworthiness may be higher than the loan interest rate of the same period.

8. Convertible Bond Financing

A type of derivative financing. This kind of bond can be converted into company stock according to certain conditions, which is more flexible, so the company can sell it at a lower interest rate. Moreover, once the convertible bond is converted into stock, it becomes the capital of the company, and the company does not need to repay.

A convertible bond is a hybrid security that is a combination of a company’s ordinary bonds and options on securities. Holders of convertible bonds can freely choose whether to convert them into ordinary shares of the company at a predetermined price or conversion ratio within a certain period.

Convertible bonds are essentially a future call option because the holders of convertible bonds have the right to buy shares at a certain price in the future.

Convertible bonds are of the nature of creditor’s rights during the normal holding period; after they are converted into stocks, they are of the nature of equity. Convertible bonds generally have redemption clauses, and the bond issuing company can redeem the bonds under certain conditions before the convertible bonds are converted.

9. Securities mortgage loan

A securities-backed loan business is a new type of loan business developed by commercial banks by integrating existing products and services such as securities transaction management and deposit management.

Through this business, customers of the bank can apply for loans by using the securities or deposits they hold as collateral assets, and the bank will provide customers with various forms and amounts of loans according to the actual market value of the collateral assets and the needs of customers.

The mortgage business provides customers with a balance tool between asset yield and liquidity. The expected returns of treasury bonds can be retained and redeemed in batches. Bonds are generally bearer bonds.

10. Inventory pledge financing

It is a business in which small and medium-sized enterprises use raw materials, semi-finished products, and finished products as pledges to finance financing from financial institutions.

The enterprise that needs financing (ie the borrower) takes the inventory it owns as a pledge, pledges it to the fund-providing enterprise (ie the lender), and at the same time transfers the pledge to a logistics enterprise (intermediary party) that is legally qualified to keep the inventory for safekeeping. To obtain a loan from a lender, it is a movable property pledge business with the participation of logistics enterprises.

Small and medium-sized enterprises with financing needs often find it difficult to obtain bank loans if they lack real estate. In economically developed countries, the inventory pledge financing business has been developed quite maturely. In developed countries such as the United States, 70% of the guarantees come from movable property guarantees based on accounts receivable and inventories.

Inventory pledge financing is to obtain loans from financial institutions such as banks by using movable assets in real trade behaviors between enterprises and upstream and downstream companies as pledges.

By Master James

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