LECTURE No. 5. Methods of financing investment projects

Method financing investments - is the financing of the investment process by attracting investment resources.

Investment financing methods:

1) self-financing;

2) financing through capital market mechanisms;

3) attraction of capital through the credit market;

4) budget financing;

5) combined investment financing schemes.

The investment process financing scheme consists of several single sources of investment activity financing and financing methods.

Self-financing is formed exclusively at the expense of its own financial resources generated from internal sources (net profit, depreciation deductions, on-farm reserves).

Domestic self-financing is very difficult to predict, but it is the most reliable method of financing investments.

Any business expansion begins with the attraction of additional sources of financing.

There are two main options for investing resources in the capital market: equity and debt financing.

In the first case, the company receives funds from the additional sale of shares by increasing the number of owners, or through additional contributions from existing owners.

In the second, the company issues and sells fixed-term securities (bonds).

This entitles their holders to long-term current income and the return of the provided capital in accordance with the conditions.

Capital market as a source of financing for a particular enterprise is very extensive.

If the conditions for remuneration of prospective investors are attractive in the long term, then investment requests are satisfied in sufficiently large volumes.

But this is possible only theoretically, but in practice, not every company can use the capital market as a means of using additional sources of financing.

The work of the market and the requirements for its participants are fully regulated by both state bodies and market mechanisms proper.

As for market mechanisms that hinder the possibility of attracting large amounts of financing, we can note the relationship between the capital structure and financial risk and the effect of the enterprise's reserve borrowing potential.

The main form of raising funds for investment is the expansion of equity capital, then loans and the issuance of bonds.

The advantages of this form of financing are that the income per share directly depends on the result of the enterprise's work, and the issue of shares for public sale increases their liquidity.

Of course, there are also disadvantages: an increase in the number of shareholders leads to the division of income among a large number of participants.

Corporate bonds - these are documented investments made in enterprises in order to obtain agreed amounts of income, as well as repay (return) previously borrowed amounts by a certain date.

Of course, on the one hand, the owner of such securities receives a certain income that does not depend on the prices of bonds in the market, but, on the other hand, since bonds are traded on the secondary market, investors always have the opportunity to play on the difference in prices - nominal and market.

This is what keeps the investment attractiveness of corporate bonds.

Raising capital through the credit market - funds received as a result of a loan (credit) in a bank.

This is done mainly to eliminate any time gaps in the reproduction process.

An investment loan has certain differences from other credit transactions.

Firstly, it is a longer period of provision and a high degree of risk.

A loan is issued subject to the basic principles of lending: repayment, urgency, payment, security, intended use.

Long-term loans can generally be extremely beneficial to large and small enterprises.

They are considered as the best means of external financing of capital investments if the enterprise cannot increase or maintain its profitability using current profits or raising funds in the long-term loan capital markets by issuing bonds at low prices.

The firm has a priority to get better credit terms than when selling on the bond market.

If necessary, certain terms of the loan can be changed by agreement, and a shorter repayment period of the loan compared to a conventional bond loan can be considered an advantage at high interest rates.

Forms of granting an investment loan can be different:

1) revolving loans;

2) convertible into urgent;

3) credit lines;

4) urgent loans.

urgent loan - this is a precisely established repayment period, payment in installments (annually, semi-annually, quarterly) under the main loan agreement.

A borrower with a stable financial position can open a special loan account, drawn up by a loan agreement, where the bank undertakes to provide a loan as needed, that is, to pay for settlement documents received in the name of the borrower within the established limit.

Such a loan can be formalized by the so-called credit line (a legally formalized obligation of a credit institution to the borrower for the right to provide a loan within a specified amount within a certain period).

It can be open for a period not exceeding one year.

A credit line can be revolving (revolving) and non-revolving (framework).

A revolving line of credit is provided by the bank in the event that the borrower experiences a long-term shortage of working capital to maintain the required production volume.

The term of such a loan cannot exceed one year.

As a rule, the bank requires additional guarantees from the borrower. At the same time, the interest rate is slightly higher than with a regular term loan.

A non-revolving (framework) credit line is provided by the bank to pay for commodity deliveries within the framework of one loan agreement, which is implemented after the limit is exhausted or the loan debt is repaid, for a specific lending object.

The opening of any credit line is based on long-term cooperation between the lender and the borrower. This provides a number of advantages for each of them. The borrower gets the opportunity to more accurately assess the prospects for expanding its activities, reduce overhead costs and loss of time associated with negotiating and concluding each individual loan agreement.

The creditor bank enjoys the same benefits, and in addition, gets acquainted with the activities of the borrower.

As a rule, every loan agreement contains guarantee obligations.

The lender sets the conditions for maximum risk reduction on the loan:

1) first of all, a loan is provided to enterprises engaged in woodworking, non-ferrous and ferrous metallurgy, oil and gas industry, military-industrial complex;

2) the minimum debt coverage ratio (1,5) is determined on the basis of the total amount of short- and long-term debt of the borrower;

3) the borrower’s funds in the project must exceed 30% of the total cost of the project;

4) the project must have good prospects for generating income in foreign currency;

5) the project must be safe for the environment and contribute to the economic development of Russia;

6) the profitability of the project must be more than 15%.

Budget financing of investments - Allocation of funds to legal entities for investment purposes from the state budget.

Only state-owned enterprises, as well as legal entities associated with the implementation of state programs, can receive state investments.

This financing is carried out in accordance with the level of decision-making.

At the federal level, only federal programs and facilities that are federally owned are funded; on the regional level - only regional programs and facilities owned by individual specific territories.

Direct budget support can be provided in the form of guarantees or budget investments and budget loans.

Budgetary allocations are limited and applied mainly to state-owned enterprises and organizations of strategic importance.

Budget investments - participation of the state in the capital of the organization.

Budget credits (financed on the basis of return) - an instrument of state investment stimulation.

An innovation in investment policy is the transition from the distribution of budget allocations for capital construction between industries and regions to selective partial financing of specific facilities and the formation of a composition of such facilities on a competitive basis, which greatly contributes to the implementation of the principle: achieving maximum effect at minimum cost.

Also, enterprises to finance investment activities can use investment tax creditwhich is a tax deferral.

The condition of this loan is repayment. The period for its provision is from one year to five years. Interest for using an investment tax credit is set at a rate of no less than 50 and no more than 75% of the refinancing rate of the Bank of Russia. Investment tax credit can be provided for income tax, as well as for regional and local taxes.

An investment tax credit is issued based on the company's application and documents confirming the need for a loan. When a positive decision on an investment tax credit is made, an agreement is concluded between the taxpaying enterprise and the executive authority.

During the term of this agreement, the enterprise reduces tax payments (but not more than 50%) for each reporting period until the amount of the loan specified in the agreement is reached.

Risk capital - one of the promising sources of funds for the development of small businesses.

This is a common risky scheme based on the fact that part of the invested projects will have a high profitability, which will be able to cover all losses in case of failure of the rest of the investment.

This so-called venture capital investment is carried out without the provision of collateral by the small enterprise.

This method of financing is applied with the help of an intermediary (venture company) between investors and an entrepreneur.

When choosing a method of financing capital investments, an enterprise must take into account both its capabilities and the advantages and disadvantages of each of the sources for obtaining investment funds.

Author: Maltseva Yu.N.

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