Investment financing
January 15, 2011 | In: loans
Whether the creation or development needs, any company needs to invest, that is to say, of developing new means of production. Besides the flow, the use of bank loans is the most commonly used.
To produce, firms need raw materials, labor, but also a variety of equipment: Land, buildings, manufacturing equipment, etc.. ; All these devices is called the production tool.
Whether the creation or development needs, any company needs to invest, that is to say, of developing new means of production. Once established, they will allow the company to produce more or better conditions, which will enable it to generate additional profits.
A company can finance its investments from internal funds, without recourse to external capital. This solution has the advantage for the company to make an independent third party, but it has the disadvantage of limiting the company in its investment opportunities.
Therefore, the use of bank loans is the most commonly used because it is often the only possible (or almost) for almost all small and medium enterprises. However, we must recognize that this funding has disadvantages for the business makes it dependent on the vagaries of the distribution of credit (amount, cost, time, etc..) And the policy adopted by its banker (choice of risk guarantees, etc.)..
Among the solutions offered by banks, there is the classic credit medium or long term.
The medium-term loans
With a duration of 2 to 7 years, the medium-term loans, to finance investments, are granted either by a single bank or a bank in competition with a specialized (SME Development Bank, Natexis, etc. .).
There must be a link between the duration of funding and the life of the asset financed. Should be avoided in all cases, the funding duration is longer than the duration of its use as medium-term credit financing. It therefore applies to investments such as average length of vehicles and machines, and more generally, to most goods and means of production of the company.
The loan period must take into account the financial possibilities of the business that, in fact, during this period, must not only ensure the repayment of the loan, but interest payments.
In all cases, funding by a medium-term credit does not cover the entire investment, it is logical that the company wants to equip themselves to make an effort flow.
The percentage of the investment program financed by a medium-term credit is generally between 50% and 75% of TTC investment.
The granting of credit to medium term is, from the banker, the subject of extensive study because the risk comes from the duration and size of the loan. He must study the market impact of the introduction of this equipment and provide the financial situation of the company, given its new production and also because of its new charges. This requires to develop a forward plan for funding that will parallel the total expenses and resources of the borrower, in order to identify future opportunities for the company to meet its debts and thereby ensure a good outcome of operation of credit.
The analysis of a credit application in the medium term based on the study of different elements:
- Economic conditions;
- Financial situation, and in particular profitability before surgery, during and after surgery;
- Guarantees (personal and / or selected according to the real property financed and where the borrower).
The long-term loans
Over a period of 7-20 years, long-term credits for investment are distributed through specialized financial institutions like the Bank of SME development, Credit finance, etc..
For this type of financing, banks do not play, most of the time, a role of relay, but in some cases, participation in risk with the lender.
Specialized financial institutions provide funding for these credits on resources, mainly from bonds.
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