How Does Capital Financing Work in Organizations?

How Does Capital Financing Work in Organizations?

Throughout the company’s life, it needs to obtain financial resources for its development. It can get them in different ways, either with internal or external sources to the company, to cover short-term or current needs or from long-term or investment. Capital is an internal source intended for long-term investment or investment.

The financing obtained through capital is reflected in the company’s own funds or equity, which increases its solvency because it is not considered external debt. 

Still, its holders are regarded as owners of a part of the company, that is, partners or shareholders, and therefore the last to receive the result of the company’s liquidation in insolvency proceedings.

This characteristic means that capital is considered a source of its own resources and, ultimately, a sign of the partners’ commitment to the company, improving its market perception, especially among its creditors.

How an increase can be made can be very varied because it depends on what the partners agree on; on the one hand, we would have two types of capital increase depending on their origin:

  • Contribution of New Partners: When a person, natural or legal, outside the company, is the one who makes the contribution, becoming a shareholder. In this case, the usual thing is that the historical shareholders are diluted; that is, they lose a percentage of participation. 
  • The contribution of new partners: This is also the one that would be made in case of company incorporation. Gift of the current shareholders: the one contributed by the company’s partners at the time of the increase. 

This extension can modify the ownership structure of the company if the contributions made by the partners are different. Still, it can be maintained if all contribute the same proportionally to their participation.

On the other hand, a capital increase does not necessarily have to be monetary, which plays a lot in the negotiations because it is possible to contribute any valuable asset. 

Material assets of all kinds, such as machinery, vehicles, real estate, tools, or furniture.

Intangible assets: Here, the evasion is the widest, from software to patents and trademarks, among many others.

Financial support: It is also possible to contribute financial assets of all kinds, such as shares of other companies, investment funds, or bonds. 

If they have a high degree of liquidity, some of them can be considered a monetary contribution. Other assets: any additional valuable contribution can be regarded as capital, except the hours of work performed by the shareholders.

Finally, although it is a non-demandable source of financial resources, in the partners’ agreement, what the partners agree can be agreed upon. 

For example, there may be a commitment to repurchase the shares by other partners, a dividend schedule, or any other freely agreed agreement.

When is it Convenient to Increase Capital?

Capital is a strategic financial resource; that is, it is used to face a medium or long-term strategy, so it occurs at different crucial moments in the business life cycle. 

In the initial phases, the partners’ capital contributions in the first years of the company’s life, when it has closed external financing channels, are crucial for its survival. 

Expansion and growth stages: When the company has a strategic growth and expansion plan in which it needs to acquire resources, it carries out a capital increase, although, at this stage, it shares the financing of this strategy with external sources.
Stages of reconversion and restructuring: In the crisis, external funding is closed again. It is another of the crucial moments in which the support of the partners to reconvert the company is vital for the company’s survival.

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