Methods of Company Financing

Methods of Company Financing

Methods of Company Financing

General Information

In today's world, the financing of commercial legal entities is considered one of the most important factors for the sustainability and development of their activities. In addition to a company's own revenues, other financing methods should always be considered for successful business development. The following widely used methods for financing a company are available in practice:

(i) increasing the charter capital;

(ii) establishment of a subsidiary;

(iii) borrowing (including loans and bonds);

(iv) investment;

(v) grants;

(vi) transfer of budget funds.

Increasing of Charter Capital

The increasing of charter capital is carried out within the framework of the rules established by law, depending on the type of commercial organization. In a limited liability company (hereinafter referred to as "LLC"), the charter capital consists of the value of the contributions of its participants, while in a joint-stock company, it is based on the nominal value of its shares. The charter capital of an LLC can be increased through the following methods: 

(i) Increasing the value of the contributions of the participants in the charter capital; 

(ii) Additional contributions made by the participants; 

(iii) The admission of a third party as a participant in the company and their contribution; 

(iv) The offsetting of monetary claims of individuals against the company with shares in the charter capital of that company.

The decision of the general meeting regarding the increasing of the charter capital, unless otherwise stipulated in the charter, is made by a simple majority vote, while the decision regarding the increase of the charter capital by the fourth method is adopted unanimously.

Since the charter capital of joint-stock companies (both open and closed) consists of shares, the increase of that capital is carried out through the following methods:

(i) Increasing the nominal value of shares;

(ii) Issuing additional shares;

(iii) Compensating the additional issued shares with monetary claims from individuals who have monetary claims against the joint-stock company.

The last method mentioned (the third one) can only be implemented in closed joint-stock companies.

The decision to increase the charter capital by any means is adopted by a two-thirds majority of the shareholders with voting rights at the general meeting. In banks, such decisions are made with a 75% majority of the shareholders represented at the meeting.

Establishment of a Subsidiary

The creation of a subsidiary is used as another method of financing the company. A subsidiary is understood as the establishment of a joint economic society by one company together with another company. Creating a joint economic society is a more favorable method of financing for the protection of invested capital.

Conclusion of a Loan Agreement

Another method of financing the company is the conclusion of a loan agreement. According to the loan agreement, one party (the lender) undertakes to transfer ownership rights to monetary funds or other replaceable items to the other party (the borrower), while the borrower undertakes to return what they received to the lender in the same amount of monetary funds or in the same quality and quantity of similar items.

The loan agreement involving a legal entity must be executed in writing. The lender has the right to receive interest from the borrower in the amount and manner specified in the agreement, and the amount of interest or the method of calculation for the loan is determined by the agreement of the parties. Unlike a loan agreement, in a credit agreement, banks, local branches of foreign banks, and non-bank credit organizations can act as the lending party.

Issuance of Bonds 

Another method of financing a company through borrowing is the issuance of bonds. A bond is a debt security that confirms the issuer's (the bond issuer's) obligation to the bondholder and, depending on the terms, pays interest (or discount) and the principal amount on a specified date. 

Obligations arising from bonds can be secured by collateral, guarantees, as well as state or municipal guarantees, in which case the bond is considered a secured bond. The decision on the bond issuance is made by the body designated in the issuer's charter. 

Conclusion of an Investment Agreement 

The next method of financing a company is the conclusion of an investment agreement. According to the investment agreement, two or more parties invest in any project with the aim of generating profit, and the profits obtained are distributed among the parties in accordance with the terms agreed upon in the contract.

Grant

It is necessary to mention grants as a method of financing. A grant is provided only for a specific purpose. Grants are given in the form of financial resources and/or other material forms. Grants are provided free of charge, and their equivalent cannot be requested back in any way. While commercial legal entities can be grant providers (donors), they cannot, under any circumstances, be grant recipients. Only non-commercial legal entities can be grant recipients. Grants can only be used for the purposes specified in the contract or in the decision regarding their allocation. 

Transfer of budget funds 

Another method of financing the company is the transfer of budget funds. According to current legislation, the transfer of budget funds to legal entities can be carried out for several purposes. Based on the legislation, transfers to legal entities can be made in the form of (i) budget loans, (ii) subsidies, and (iii) investments in state-owned enterprises. 

A subsidy is a financial resource provided free of charge from the state budget. Subsidies are primarily given to support sectors of public importance that operate at a loss, with the aim of covering those losses. Examples include the subsidies allocated by the state to "Baku Metro," "Azerbaijan Airlines" JSC, and agriculture.

Budget loans are financial resources provided for a certain period during the year from the centralized expenditures of the state budget (on the condition that they are returned within the budget year). It is also possible to carry out investment placements using budget funds through state companies. An example of this is the "Azerbaijan Investment Company" OJSC, established by the President's decree. The main purpose of this company's activities is to ensure the development of the non-oil sectors of the economy and to carry out investments in projects implemented within the country or abroad, including making long-term investments by acquiring shares in the charter capital of economic entities and other commercial organizations operating in these sectors.

As can be seen, the investment of the state in legal entities occurs through the investment of budget funds into the charter capital of an intermediary legal entity (the "Azerbaijan Investment Company" established by the state), and this fund is subsequently allocated to the charter capital of other legal entities.

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Note: The information contained in this article should not be interpreted as legal advice or legal opinion. Our company has extensive experience in financing legal entities and provides professional legal services in this regard. You can send us your questions and service requests in this area, and our team is ready to support you with pleasure.

For further questions and information, please contact us:

Email: office@bonafide.az; Tel: +994125973047; Whatsapp: +994707103785;