Sources of investment project financing are ways of obtaining funds, which can be own and external (borrowed and non-repayable). These are cash flows and funds that serve as investment resources. The structure and volume of these investments determine the vector of development of the investment sphere, the pace and stability of growth of the national economy.
The search for resources for financing investment activities in the company is carried out by the director. An experienced top manager considers a set of potential ways of obtaining assignments and chooses the best one, assessing the advantages and disadvantages of each of them.
Financial assets are attracted on an ongoing basis for business development. The need for investments arises when the company's own funds are not enough to implement the project. Sources of investment project financing are divided into the following main groups by the direction of raising funds, by the intended purpose of investment, taking into account the source of investment and resources of receipts. Consequently, investments come from internal and external sources. The latter are divided into borrowed and attracted. Internal ones are formed by mobilizing own resources, using earned profit and applying reserves. The first group includes:
own funds from depreciation of fixed capital, deductions from profit, receipts from insurers and institutions in the form of compensation for damage;
contributions that are provided on a non-refundable basis by higher industrial and financial groups, joint-stock companies, holding companies;
various types of assets - software products, land plots, industrial property;
funds raised after the issue and sale of shares of the enterprise;
charitable contributions and similar receipts.
It is naturally believed that for the financial stability of the enterprise it is advisable to use internal sources of funds. However, when it comes to capital-intensive projects, not all companies can independently ensure their functioning.
External sources of financing the business of the enterprise:
funds from the state, regional or city budget, support funds, which are transferred free of charge;
direct investments of international financial institutions and organizations, individuals, enterprises and states;
numerous forms of loans provided on a repayable basis, bank loans, bills of exchange.
Internal self-financing involves capital investments exclusively from own resources. They are formed from net profit, internal reserves and depreciation charges. Attracting internal sources of financing for an investment project is one of the ways to use funds that are intended to form an investment portfolio or withdraw profits.
Business owners can reinvest profits in full, withdraw them for consumption or investment in other projects, or combine both approaches. In this way, entrepreneurs can increase production volumes, find a balance between deferred and current consumption and increase their own income. The advantages of this source:
the decision to attract funds is made by the company's managers and its owners, there is no need to obtain the consent of other individuals or organizations;
due to the absence of interest on loans, profits from such investments are generated in large volumes;
the risks of bankruptcy are reduced by ensuring the solvency of the enterprise and its financial stability.
Self-financing is limited in volume and does not allow making reliable forecasts in the long term, although it is the most reliable way to finance investment projects. Companies rarely use their own funds as the main source. This is due to the fact that young businesses do not have enough resources for this. Most often, it is used at the initial stages of the enterprise's life, when the business cannot fully take advantage of credit products, or to implement small investment projects. To implement strategic expansions, it is impossible to do without attracting other sources.
The disadvantages of self-financing include:
a limited amount of funds, which creates limited opportunities for investment and operating activities;
high cost in contrast to borrowed sources;
the return on equity ratio remains unchanged due to the refusal to attract borrowed funds.
Consequently, using only its own resources, the enterprise limits the pace of development and does not use mechanisms for increasing profits on invested capital, although it maintains financial stability.
Borrowed capital is considered to be the main source of financing. Borrowed sources of investment project financing include bank loans, loans from individuals and organizations, factoring and leasing. The peculiarity of using this source is the mandatory return of the entire amount, taking into account the accrued interest for the entire period of use.
wide opportunities for raising funds with guarantees and a high credit rating;
flexible terms for providing loans that can change according to the needs of the borrower, and the ability to win on the difference in interest rates;
lower costs compared to equity.
Consequently, the financial potential of the business grows due to the growth of production rates and expansion of assets. The ability to generate an increase in financial profitability appears.
serious risks of loss of solvency of the company and a decrease in the financial stability of the enterprise;
high dependence of the cost of borrowed capital on changes in the financial market, with a decrease in the interest rate, the use of previously received loans becomes unprofitable;
assets received from loans generate less profit due to interest payments for use;
difficulty in obtaining loans that require third-party guarantees, collateral, and other conditions.
There is a positive trend towards an increase in the share of attracted funds, since the limited resources of companies make them an insufficient source of investment financing. Moreover, attracted sources - private and public investments, funds from bonds and share issues - have virtually unlimited possibilities. This is a virtually bottomless market. By providing attractive terms of return for potential investors in the long term, a company can satisfy any of its investment requests. In practice, not every company can take advantage of the capital market. This process is regulated by both market mechanisms and government agencies in the form of antitrust legislation.
In generally accepted practice, attracted sources of investment project financing include any receipts of funds that are involved in investing and do not belong to the company by right of ownership. This group includes government support funds, the issue and sale of company shares, share capital, assistance from founders, charitable contributions, as well as assets such as patents, trademarks, and software products of the company. Mobilization of funds in the capital market is possible through debt and equity financing. In the first case, the company issues and sells bonds (fixed-term securities), and in the second case, it throws shares on the market.
The profitability of shares depends on the work of the enterprise. Closed joint-stock companies have fewer opportunities to attract capital than open ones. At the same time, they are more limited in the dissemination of information that constitutes a commercial secret. By issuing shares to the public, business owners increase their liquidity. When placing shares on the stock exchange for the first time, the company increases their value by 15%, and therefore buyers on the first day of trading often lose relative to the market. Consequently, equity financing of investment projects is the raising of funds without obligations to repay and for an indefinite period. At the same time, the increase in the number of shareholders leads to the fragmentation of income between them and significantly complicates management, and sometimes threatens a complete loss of control. New issues of companies that have been operating on the market for a long time may be negatively assessed by investors and have an adverse effect on their value.
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