Types of Financing for business operations Economics: 10.2 Types of Financing for business operations

Learning target Students will learn about the three types of financing available to businesses: short-term, immediate-term, long-term.

Success Criteria Students will be able to describe short-term, immediate-term, and long-term financing that businesses can choose from. Students will be able to analyze what factors determine the choices businesses make when choosing to borrow funds. Students will be able to identify the role investments play in increasing productivity.

Three kinds of financing Debt financing – raising funds for a business through borrowing. Debt financing can be divided into three categories: short-term, intermediate- term, and long-term.

Short-term financing Short-term financing – funds borrowed by a business for any period of time less than a year. Pg. 265 chart Ex: Trade Credit – when one firm lets another firm buy their goods for payment at a future date usually 30-90 days later.

Intermediate-term financing Intermediate-term financing – funds borrowed by a business for 1 to 10 years. When a company wants to expand their business by buying more land, buildings, or equipment they usually will use intermediate-term financing. Pg. 266 chart Ex: loans or leasing

Long-term financing Long-term financing – funds borrowed by a business for a period of more than 10 years or funds raised by issuing stock. Long-term financing is used for major expansion such as building a new plant or buying expensive, long lasting machines to replace outdated ones. For financing investments like these lasting 10 to 15 years or more corporations either issue stock or sell bonds.

Long-term financing Usually only large corporations finance long-term debt by selling bonds. These companies have huge assets that appear to be better risks for investors. Pg. 267 chart Ex: bonds or stocks

Rally Robin Define short-term, intermediate-term, and long-term financing. Give an example of when a business might use each type. Describe one term used from the charts on pages 265-266.

Success Criteria Students will be able to describe short-term, immediate-term, and long-term financing that businesses can choose from. Students will be able to analyze what factors determine the choices businesses make when choosing to borrow funds. Students will be able to identify the role investments play in increasing productivity.

Choosing the right financing Financial managers try to obtain capital at a minimum cost to the company. To do so they try to choose the best mix of financing. Four factors impact these decisions: Interest rates Financial condition of the company Market climate Control of the company

Interest rates When interest rates are high businesses are less likely to take out a loan. They deal with this by delaying their expansion and hope interest rates drop. When they do drop businesses will take out a long-term loan.

Financial condition of the company A company whose sales and profits are stable or are expected to increase can safely take on more debt as long as their current debt isn’t too large. Financial managers use cost-benefit analysis to determine if the potential profits will more than cover the costs.

Market climate Financial managers need to be aware of the market climate when deciding to buy or sell bonds/stock to raise financing. If economic growth is slow, investors may prefer the fixed rate of return on bonds or preferred stock rather than common stock.

Control of the company Bonds and preferred stock do not have voting rights attached to them. Common stock does have voting rights and because of this sometimes financial managers may need to get the approval of owners of common stock before making decisions involving money in the company.

Rally Robin Identify each of the four factors of financing. How does the overall economic climate affect a business’s decisions regarding financing?

Success Criteria Students will be able to describe short-term, immediate-term, and long-term financing that businesses can choose from. Students will be able to analyze what factors determine the choices businesses make when choosing to borrow funds. Students will be able to identify the role investments play in increasing productivity.