1.- What different ways can companies use to finance themselves?

Among the different ways of financing, companies can establish two policies: to finance themselves with their own resources (or with part of the profits generated in a season) or to get money from external sources. Sometimes companies don’t have enough money or need more money to develop their plans. Bonds, shares or loans are often examples of how they can receive money from investors, banks or other companies. But when a company gets a loan it is also getting in debt with its creditor and for this reason this company must be solvent to repay the debt in the future.

2.- What are the characteristics, advantages and disadvantages of each?

On one hand, self-financing is a common way to get money without creating a new debt in the company. The main benefit of self-financing is that the company doesn’t have to pay interests for it, but if the investment that the money was assigned for is not profitable it will cause a decrease in the company’s share capital.
On the other hand, every company of the market needs external financing for different reasons and the usual ways to get money are issuing bonds, shares or loans. They will suppose a financial cost to the company. The main difference between them is that when a company issues shares the buyer (or shareholder) immediately becomes a member of the company and must receive the proportional part of the generated profits. If the company issues bonds or loans the buyer of them (or creditor) has a legal document which recognizes this debt. Also bonds and loans have a fixed yield (which doesn’t depend on the company’s result) and a maturity, in contrast to shares that don’t have a maturity nor a fixed yield.

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