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Finance companies and financing sources and determinants

funding companies

The finance companies play an important

 role in the world of finance and economics, and it is imperative to understand what finance companies are, what are their types, what are their objectives, and what should be done in order to benefit from the financing companies and to know the sources of the determinants of financing

Finance companies are financial institutions that were newly created to meet the needs and requirements of individual consumers.

The types of financing companies are individual financing companies, consumers, sales financing companies, trade finance companies, and individual financing companies. Consumers are a financial institution specializing in granting small loans.

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Granting these loans depends on the personal guarantee of the borrower and the interest rates on these loans are high compared to the loans granted by commercial banks in addition to their risks are also high and the characteristics of commercial finance companies Fixed capital financing and working capital financing and there are forms of financing business activities, including for example financing with guarantee Accounts receivable i.e. securities receivable and financing secured by fixed assets and lease financing

Sources and determinants of financing

After the financial management of the corporation has completed determining the quantity and quality of its needs of funds, it remains for it to decide the sources of funding that it must choose from among them and also decide how to mix these sources in terms of quantity, type and source, taking into account the following the impact of debt on the profitability of the institution and its value And the appropriate level of debt for the institution to place the right mix of short-term and long-term sources of financing and equity.
The characteristics of financing sources are maturity, right to income, right over assets, management, control, flexibility, impact on returns, sources of financing, financing determinants, and forms of short-term financing.
Entitlement is the difference between borrowing funds and the funds of the project owners submitted from them in the form of capital or in the form of retained earnings with the following. The loans have certain terms that must be repaid regardless of any other considerations. The increase in borrowing leads to an increase in financial risks, an increase in the capital and an increase in the net value of the institution And reduce indebtedness and financial risks.
The right to income There are three aspects that distinguish borrowing money from property funds are priority and certainty.
The priority of the creditors is the right of the creditors to obtain the principal of their loans and their interest before the owners of the project obtain any of their rights, and in some cases the project owners may be forced to stop distributing profits under the pressure of the ordinary creditors if such distribution would lead to threatening the priority of the creditors or delay the fulfillment of their rights.
Ensure that ordinary creditors have the advantage over owners by ensuring that their debt and interest are obtained on the dates agreed upon for payment, regardless of whether or not the institution has achieved profits. Therefore, if it fails to pay, it exposes itself to legal prosecution. As for the owners, they do not get the profits until after realizing them and a decision is made to distribute them and after payment Their obligations to lenders.

The right over the assets.

If the enterprise encounters a problem and leads to its liquidation, consideration is turned away towards its assets so that the rights of both creditors and investors are fulfilled, which are the excellent creditors and the ordinary creditors with mortgages on the assets of the institution. Ordinary creditors who are not insured by mortgages on the assets of the corporation, the privileged owners and the ordinary shareholders.
Management and control. The management of the company is a right of the rights of the ordinary owners, the holders of the ordinary shares in the joint-stock companies and the owners of the ordinary companies. The excellent creditors do not have such a right. Creditors do not have any direct voice in the management of the institution. The owners of excellent capital do not participate in the management and flexibility. Borrowing is more flexible in financing compared to issuing Shares, direct financing and the impact on returns, borrowing has less effect on the erosion of returns compared to increasing capital, because the right of the lender is limited to interest, part of which will be absorbed through the tax, and thus it does not increase the dividend base, unlike the increase in capital that leads to an increase in the distribution base and its rights in Taxable profits.
Funding sources: Borrowing is done either through commercial banks or by issuing short and medium-term bonds and increasing the founders ’contribution by issuing preferred shares or increasing the rights of ordinary shareholders, which can in turn be done by offering more ordinary shares for subscription or increasing undistributed profits.
The determinants of financing are the relevance between the funding source and its uses, risk, timing, general economic conditions, the size of the enterprise, and the borrowing capacity.
Forms of short-term financing, trade credit, bank credit, commercial paper, account-credit financing, and inventory-backed financing