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Commercial Law

Economical part - efficient fund rising and utilisation of capital

1.      Sources of financing 2.      Concentration of capital 3.      Market protection 4.      Foreign investments

Financing resources

Every economic entity that shows any activity needs to ensure financing in order to fulfill its set goals.

Kind of financing resources

In general we distinguish financing sources according to the type of sources as sources internal and resources external. Internal resources are resources that the company

creates itself based on its activity and their common feature is their easy accessibility for all companies.

External resources are resources from the external subject

Internal resources

Internal resources are separated into:retained profit,financial reserves,depreciations,releasement of capital due to sale of assets.

Retained profit

means positive income from operations after tax, after deduction of payments into compulsory funds and other funds created from profit, payments of director’s fees and dividend. Its amount influences many other factors such as tax rate, amount of payout dividends and directs fees, amount of payments into the compulsory reserve fund set by law and the amount of payments into other funds created form profit.

Financial reserves

are represented by a system of reserves and funds that are created as a protection against unpredictable situations that can occur in the future. We recognize compulsory and voluntary funds. Compulsory funds are mainly created as means of protection of stockholders concerns. In the majority of companies there are nowadays at the same time also statutory funds that are established in the articles of association.

Depreciation

are in money terms expressed depreciation of long-term assets and are above all an important financing resource. Through depreciation the assets lose part of its original value and this is expressed through depreciation. The company’s policy determines the method of depreciation. Depreciation is throughout the whole depreciation period an expense item but in the long-run they influence quick renewal of long-term assets due to purchase of new fiscal assets amounting to the amount of the depreciation.

External resources

Another important group of financial resources that the company has the opportunity to gain are external resources. Their accessibility can be for some smaller or newly formed company very difficult. With growing indebtedness of a company the risk for potential investors, that contemplates where to aim their free financial means, rises that has a negative effect on the growth of costs of various external resources, for example loans. We can divide them into loan, factoring, forfeiting, emission of stocks, emission of bonds, leasing, venture capital and financial recourses of the state.

Loan

Loan – it is a given financial amount for consideration, that represents for the provider an investment with expected revenue in future in the form of interest and for the receiver it represents the possibility to use an external financial resource that will have to be in future repaid including the costs connected with its gain. When planning a project it is necessary to consider the rate of the projects return that has to be higher than the costs connected with the project. The providers of loans represented mainly by banking houses run very in-depth checks on their clients while considering a money loan and try that way to prevent dead claims.

Types of loan

Bank – overdraft Discount – credit Loan against goods or securities Mortage credits

Factoring

Is one of the means that can ensure everlasting liquidity of the company. In reality it is an assignment of short-term claims for a consideration from which is deducted a discount. Banking houses mostly provide factoring and some specialized factoring companies. Factoring incorporates financing, guarantee against financial insolvency or ill will of customers and also encashment and administration of claims with prolonged maturity that occurred as a result of supply deliveries or services to regular customers.

Factoring can be distinguished as real factoring and unreal factoring:

Real factoring - through repurchase of the claim the supplier ceased to be the creditor and the factor has no chance of reverse sanction in case of a dead claim.

Unreal factoring – the factoring company also repurchases claims that have worse financial standing but retains the right of reverse sanction.

Forfeiting

Is very similar to factoring but is mainly used while doing business abroad. Similarly as with factoring it is a repurchase of middle-run and long run claims with maturity longer than 90days by the forfeiting organization. The majority of forfeiting organizations set the requirements that the claim has to fulfill in order to be repurchased by the forfeiter. The claim has to be in a freely exchangeable currency, has to be ensured by bank’s collateral, bill of exchange or documentary credit with delayed maturity and there is also usually a minimal value for repurchase set out that moves around the limit of $200 000.

Issue of shares

One of the most used means of gaining capital is issue of shares. Only a joint stock company in two cases can issue the shares in the Czech Republic:- while establishing the joint stock company- while increasing the basic capital of the joint stock

company or its financial restructuralization 

Private issue of shares: In the case of private issue of shares the shares are

offered to a group of investors known in advance. Very often such an issue is done through venture capital from another subject that has decided to invest into the joint stock company? The conditions for investment and also the elimination of high risk is usually a requirement for higher influence level in management of the company such as membership in a statutory body of the joint stock company and similar. These shares are not then offered to the public market. The private issue is usually used with smaller joint stock companies to restrict the costs of public issue of shares in this way.

Public issue of shares

If the joint stock company decides for the public issue of shares it has to fulfill all the requirements rising from the Securities Act. Very important is the accreditation of the issue of shares by the national bank of state, where the public issue is planed. Unlike in the private emission the shares are then offered to unlimited amount of interested persons based on public offer.

Issue of bonds

A bond is a type of security with which is connected a right to get paid the outstanding amount and the duty of the issuer to fulfill this right.

The bonds can be divided according to the appearance into:

Listed, they have physical appearance and the owner has the security on him. Such a security consists of a coat and coupon sheet. A coupon sheet consists of coupons and a voucher that entitles the holder of the bond to ask for a payout of the bond interest on the maturity day that is marked on the bond. The voucher entitles the holder to collect another coupon sheet.

Booked, they are only kept as an entry with the administrator of registry of securities of the country.

According to the issuer into: Government bonds – are issued by the government or

by a public institution, they carry the smallest risk but offer a lower yield than other issuers

Communal bonds – are issued by towns and councils Company bonds – are issued by companies Bank bonds – these are bonds that are issued by a

banking house. Usually when choosing a bond on a capital market it applies that the higher risk is connected with holding the bond the higher the yield for the investor, otherwise he would choose less risky investment with the same yield.

According to the type of interest rate:

With a floating coupon, the interest rate is during the time of interest payouts floating and is usually bound to a certain exchange rate

With fixed coupon, when a fixed interest rate that does not change during the whole period

With zero coupon, when there are no interest payouts during the time of the maturity of the bond. The issue pays out all the interests including the nominal bond value at the end of bond maturity.

Advantages of financing through issue of bonds:

The company includes the interest from the bond into its costs that lower the capital costs of bonds

The creditor does not participate in the company decision making process which makes it easier for the current owners to keep control of the company

When the issue is done well it is possible to obtain a higher amount of capital than through a loan

The time layout of paybacks when the issuer pays for the time of paying back the bonds only interests and the principal is paid out in the last year

Disadvantages:

Existence of the issuing costs that do not exist when considering a loan

The duty to make public the issue conditions and in case of publicly traded bonds the informative duties towards the securities committee have to be fulfilled

In case of a fall in the expected profit the fixed bond yield or payout of the principal bring financial problems

Leasing Leasing represents a form of financing through which the

company uses long-term assets belonging to another subject for a payment that is usually divided into separate regular part payments.

Due to the fact that the assets do not belong to the company, the depreciation for these assets cannot be applied by the leaseholder and so the company loses the advantage of reinvestment into its long-term assets. When considering the risk connected with running the equipment, they are usually transferred onto the producer of the equipment and at the same time the equipment is insured against damage and any damages caused.

Financial leasing

means a long-term lease where the length of the lease equals the length of economical life span of the leased object. In this form of leasing the lessor transfers the risks connected with usage onto the leaseholder. After the leasing comes to its end the asset is transferred onto the leaseholder for a price that is not allowed to be higher than the depreciated price that the assets would have while applying equal amortization. If at the end of the leasing the assets are not transferred to the leaseholder, it is then called working leasing based on the current legal system. In a majority of cases the leasing contract can not be cancelled.

Financial leasing can be also divided into: Direct – type of leasing where the lessor is at the same

time the producer Indirect – it is the most widely spread type of leasing. It is

a three sides legal relationship among the leaseholder, the lessor and the creditor.

Reverse – long-term company assets are sold to the leasing company and the company that releases it to the original owner.

Working leasing is a short run lease where the lease period is shorter than

the economical life span and it is supposed that the asset will be returned to the lessor when the lease comes to an end. The leasing repayments from one leaseholder represent only part of the purchase price. Working leasing is often used with big highly specialized working machinery because it is not worth the companies having it among their current assets such items considering their irregular highly seasonal usability, costs of up keeping, parking costs and other cost connected with possession.

Venture capital Venture capital is one of the possible forms of

financing projects with a high risk level. Fundamentally it means that the investor puts in his financial means to carry out a risky but promising project, most frequently into the basic capital of the company. For this deposit the investor demands a possibility to influence the running of the company on the grounds of better protection for his investment. This form of investing was established in the USA in the 1980s and spread into Europe a few years later.

Venture capital can be divided based on the stage in which the company is in: Seed financing – it is usually the research and development

of a product or service before establishing the company that is being financed.

Start-up financing – the company has already prepared a project, there are market research results and it is necessary to finance production and distribution.

Early stage expansion – the company has existed for the maximum of 3 years it does not make a profit but it has an interesting and perspective project. The investor relies on his intuition and up to now experience with running a non profit making company while choosing the investment project.

Expansion financing – it is intended to increase the company’s capital in order to launch another product, service, technology and spreading into new markets. It is often used to finance acquisitions. It is an investment with a low level of risk for the investment.

Rescue financing – it is intended to keep the company running. It is usually connected with a modification of a product, management of the company or orientation for new markets.

Management buy-in or buy-out – financing through buyout of the company by current or future management

Refinancing of bank loans – paying back bank loans which lead to the lowering of the ration of debts towards its own capital.

Using of financial resources of the state

If there is a large disproportion among various business sectors or the competitiveness increases through the import of goods from areas that have lower costs than the competitive strength in the given sector lowers and one of the instruments of correction of such a disproportion is an obtaining of a government subsidy.

There are these types of government subsidies:

Direct subsidy, which is a subsidy to a concrete subject in a form of investment or no investment grant, returnable financial aid or export premiums.

Indirect subsidy that is a supportive activity of the state where the state indirectly contributes with stimulants such as giving government contracts, tax allowances, government loan guarantees, free of charge economical and legal consultancy.

Main areas of government subsidies:

research and development activities agriculture subsidies ecological projects projects of the state structural policy support of small and medium-sized businesses social projects support of export

Type of debt Costs of capital Reason

Short term debt lowest Interests is part of costs, short term of expiration brings lower risk for the investor

Middle term and long term capital

More expensive then the short term

Interests can be part of tax expenses, as a result of longer term of capital expiration is such an investment more risky for the investor and he demands higher interest then with short term loan

Joint-stock capital The most expensive Dividends are paid from after-tax profit and it is not possible to cover them into expenses