External Sources of Finance

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Russian Economic Academy after G.V. Plekhanov

Corporate finance

Course work

External Sources of Finance

Prepared by:

2nd year student of IBS

Group 5203

Dobrelya M.

Professor:

A.S. Fedyunin

Moscow 2007

Plan

1. Introduction

2. Types of external sources of finance

· Personal Savings

· Friends and Family

· Gifts

· Grants

· Commercial Banks

· Building Societies

· Factoring Services

· Share Issue

· Debt and Debentures

· Corporate bonds

· Venture capital

· Leasing

· Hire Purchase

· Equity

3. Advantages and disadvantages of external sources of business financing

· Bank credit

· Shares

· Bonds

· LOAN or SHARE capital?

· INTERNAL or EXTERNAL financing?

· SHORT-TERM or LONG-TERM financing?

4. Business Financing in Russia

5. Conclusion

1. Introduction

In present economic conditions any business faces a problem of attraction of financing. Business finance is providing the business with available money capital for use with commercial purposes. Capital requirements of a company can be short-term and long-term. Main sources of short-term and long-term capital can be internal and external. The main organizations, which can serve as sources of business finance are commercial banks, credit unions, savings and loan associations, factoring companies, discount houses, financial houses (industrial banks) and investment banks.

Acceptance of the investment decision is given hardly and in many respects is defined by the financial strategy selected by a company management. Other important factor are also external conditions in which the enterprise functions, including a level of the interest rates, a current and predicted condition of the share market, presence of alternative financial tools, quality of given bank services, etc.

Essentially important thus that the way of involved investments corresponded to strategy of development of the enterprise is, for example, to its plans of an output for new commodity markets or absorption of the companies, and also considered readiness of administration to take up the risks connected with realization of this or that investment decision.

Internal sources are the sources of finance that come from the business' assets or activities. Internal sources can be such as: retained profit, sale of assets, reducing stocks and trade credit.

External sources are the sources of finance that comes from outside the business. It involves the business owing money to outside individuals or institutions.

And its types, advantages and disadvantages will be described below.

2. Types of external sources of finance

If the enterprise considers opportunities of attraction of external financing, there is an uneasy problem of a choice of the most suitable tool from the big set of existing financial tools before it. Among them it is necessary to note short- or long-term rouble or currency bank credits, share and debt securities. There are also "intermediate" and derivative securities, such as convertible bonds, options, etc.

In fact, within last 20 years with development of the share markets and investment activity in industrially developed countries there was a set of new complex financial tools. Therefore the choice from an available variety of the most suitable tool important enough and a challenge, which decision frequently demands the qualified assistance from investment bank or the financial adviser.

For some businesses, a traditional loan might be the best form of finance. For others, attracting an equity investor might be best.

And here are the types of available external sources of finance:

Personal Savings

This mainly applies to sole traders and partnerships. Owners may use some of their own money as capital to invest in the business. For instance, a person may be made redundant by a company that needs to reduce in size. They would receive redundancy payment that they might use to start their own business.

This is considered an external source as it is assumed that the money lent to the business will be paid back to the private individual in the future, possibly with an extra amount to compensate the individual for the help they gave. It can be a short or long term source of finance, depending upon the amount invested and the decision of the person using their savings.

Here we can also speak about such sources as friends, family, gifts and grants.

Friends and Family

Raising money from family and friends is a common way of funding a new business. In some cases, it may be the only way of obtaining funding on reasonable terms, either because you have no credit history, the business model is completely untested or you want to maintain secrecy about your plans.

While this source of funding is often easy and quick to obtain, before taking money from family or friends you must consider the risks. What if your company is not as successful as you first thought? How will this affect your relationship with family and friends?

Be sure you are making a business decision and never take money from family and friends when the amount being invested is a relatively large amount for that person. You should ask your lawyer to prepare a short form agreement setting out the basis for the funding.

Gifts

These include money, time, effort, skills, introductions and any other item that might have a monetary value. People give these with little or no expectation of a financial return.

However, gifts often have some emotional, moral or in-kind string attached. For example, university students or employees may provide free labour for work experience but they expect to learn and be provided adequate supervision and recognition.

Grants

Grants can be obtained for research and development, prototype development, early stage commercialization, feasibility studies and a host of other activity. It is useful to remember these are not gifts.

Most grants are competitive and your business must make a very substantial commitment for your application to have a chance of succeeding.

Commercial Banks

Involving the loan capital, the enterprise assumes liability to pay on a regular basis the certain percent, and also to extinguish the basic sum of a duty upon termination of term of the loan (or according to the coordinated schedule of payments). In practice, the majority of the enterprises in searches of additional means address to commercial banks more often, and bank credits are for them most the familiar and accessible form of financing.

Bank credits

Urgent bank loans frequently are the most accessible means of attraction of additional resources in the countries with the developed bank system. Thus the level of interest rates under credits, among other factors, is defined by a conjuncture of the financial market, demand of managing subjects for credit resources, presence of alternative offers of financial assets and risks. Conditions on which is granted a loan should provide rate of return comprehensible to bank in view of an existing risk level on crediting the given enterprise. Credits can be subdivided on short-term, intermediate term and long-term. In Russia by virtue of existing economic conditions credits are given, as a rule, for the term of no more than one year and under high enough interest rate.

We tend to consider two types of finance that banks offer to businesses, overdrafts and loans.

If a business spends more money than it has in its bank account, we say that it has become overdrawn. Businesses will often have an arrangement with the bank whereby the bank will pay the extra money provided the business will pay them back in a fairly short period of time, with interest. This is a short term source of finance and is useful for small amounts. It is often used for buying supplies / inputs.

A bank loan is a long term source of finance and will often be for much larger sums of money. A loan is useful for a business that is starting up or looking to grow. Loans are often used to buy fixed assets (see balance sheets) such as machinery and vehicles. A business will pay the bank back each month in installments and will also pay an interest charge.

Interest - Banks are providing a service by lending money in the form of overdrafts and loans and banks will charge for this service (they want to make a profit too). When a business takes a loan, it will agree to pay it back over a period of years but it will also pay an extra charge. This charge, called interest, is a percentage of the value of the loan.

The interest rate is set by the Bank of England and it varies. The higher the interest rate, the greater the percentage of the loan that the business must repay. In other words, if the Bank of England raises interest rates, a business with a loan will find it has to pay the bank more each month as it pays off its debt. Likewise, a fall in interest rates will mean that the business will have lower costs (and therefore more profit). The interest rate is an example of an external constraint - something outside the business' control that can seriously affect the business' performance.

Building Societies

A building society is a form of financial that is similar to a bank. It also provides loans but specializes in providing mortgages.

A mortgage is a special type of loan used to buy property (factories, shops, etc). Loans and mortgages tend to be paid back over a long period of time, usually several years, at an interest rate.

In recent years, the differences between banks and building societies have reduced and both are now very similar. Both can offer mortgages and loans.

Factoring Services

This is the act of selling your accounts receivable to a third party at a discount. This means the third party takes on the risk and costs of collecting debts. The main advantage to the business is the reduction in administration and risk with immediate cash returns.

Businesses are often owed money. If you supplied car parts to local garages, you would often deliver the products to the garages and receive payment within a few weeks. The garages would be paying by trade credit (internal source) and are in debt to you (they are your debtors).

A business may have difficulty in collecting its debts from its customers but may need to get its hands on money very quickly. A special factoring company may offer to handle the debt collection process for a charge. The factoring company pays the business most of the value of the debt first and would then collect the money from the debtor. This is a short term source of finance.

Share Issue

It is an important source of finance for limited companies. A share issue involves a business selling new shares that entitle the shareholders to share in the control of the business. Shares are expression of the property right to a part in the capital of joint-stock company. The companies let out actions with the purpose of mobilization of the long-term capital for development of business. The investors getting the actions, become co-owners of the company and its all actives minus requirements of creditors. Shareholders in common divide the risks connected with activity of the enterprise, and have the right to reception of the certain part of profit of the company. Each share gives the shareholder a vote on the direction of the company. This usually means that the shareholder can elect the board of directors of the company each year. If the shareholder doesn't like the way the directors are running the business, they can elect new directors. This is a good incentive to the directors to run the business well and make a profit which will be paid to the shareholders in the form of dividends.

The more shares a person holds, the more control they have over a company. If one company wanted to take another company over, it could arrange to buy over 50% of that company's shares. This would give it a majority of control and, therefore, ownership.

Issuing new shares can raise a lot of capital that can be used for expansion (buying more fixed assets, etc). It is a long term source of finance. If the total number of shares rises, the votes of existing shareholders will have slightly less significance and they will have less control. The business will also have to pay dividends on a larger number of shares.

It is important, that the enterprise, planning to involve investments by means of a share issue, had the long-term plan for development of the company with the instruction of directions of use of the involved means. Thus management of the company should realize the fact of creation of original partnership with new shareholders. The investors putting means in the action of the company, it is accepted to classify on strategic, financial and - in case of the open accommodation of actions - private (fine) investors.

Below features of two basic kinds of actions - ordinary and exclusive are considered.

§ The investor putting means in the action of the company can pursue the following purposes: reception of high profit (this purpose investor usually pursues);

§ Participation in creation and development of business of the company (the strategic investor).

Debt and Debentures

Debentures is a form of long term loan that can be taken out by a public limited company for a large sum and it will be paid back over several years. It is usually borrowed from specialist financial institutions.

Debt is a formal arrangement between your business and a third party to borrow money. The amount borrowed is called the principal. Such an agreement usually requires the business to repay the principal plus interest at some future date.

Businesses use short-term debt such as an overdraft facility to overcome intermittent cash flow shortfalls. Long-term debt, such as mortgages or debentures, is used to acquire assets.

Another type of long-term debt is a convertible note. This requires the business to issue shares to the third party in lieu of money. Interest is usually charged while the principal remains outstanding. Such debt instruments can look very similar to equity.

Lenders consider risk and capacity to pay interest and repay the principal when they assess loan applications. Their assessment is based primarily on the business's track record and asset base, with growth potential a secondary consideration.

Usually debt must be secured against the company's assets and very commonly must also be secured against the assets of the company's owner, called a personal guarantee.

Debt Factoring

A business sells its outstanding customer accounts (those who have not paid their debts to the business) to a debt factoring company.

The factoring company pays the business - say 80-90% of face value of the debts - and then collects the full amount of the debts. Once it has done this it will pay the remaining amount to the business less a charge.

It is a good way of raising cash quickly, without the hassle of chasing payments. But it is not so good for profits since it reduces the total revenue received from those sales.

Debt collection agencies

These organisations can help recover outstanding debts from your customers. The agency typically charges a commission based on the gross sum of the debt collected. The commission rises with the age of the debt.

Export Finance Insurance Corporation (EFIC)

EFIC insures against the risk of non-payment, giving companies the confidence to offer more competitive payment terms to their overseas customers. Other services include various forms of debt finance.

Corporate bonds

Corporate bonds are debt issue securities. Bonds can address at a stock exchange or on out-exchange market. There is a big variety of bonds depending on conditions of their release, accommodation, the reference, payment of the income and repayment. For example, bonds can be middle- and long-term, convertible or unconvertible, with the fixed or variable coupon. Under some bonds (discount bonds) the percent is not established in general, and the income is formed due to a difference between by repayment and by purchase. As a rule, the companies large and known to the market resort to release of bonds only. Release of bonds is usually carried out at participation of financial advisers or investment banks.

Venture capital

Some individuals join together to provide finance for new businesses that are just starting-up. They look for promising businesses and invest in them, hoping that the businesses will grow and that they will make a profit. This is similar to issuing shares.

Leasing

Leasing is like renting a piece of equipment or machinery. The business pays a regular amount for a period of time, but the item belongs to the leasing company.

Leasing is a formal agreement with a third party that buys an asset and then allows you to use it for a regular fee. At the end of the lease the asset often has an amount left outstanding called a residual. Payment of this residual by the business allows the business to gain ownership of the asset.

Leasing can be an effective way to generate substantial cash. For example a business may sell a vital asset to a commercial bank and lease the asset back from the bank upon entering a formal lease agreement. This way the business unlocks the equity of the asset while taking on an ongoing liability.

Leasing involves a business renting equipment that it may use for several years or months but never own. It will have a contract with a company who may come in to repair and service the product. The deal may also involve the product being replaced with a new model every so often. Businesses often lease equipment such as photocopiers.

Financial leasing is the most widespread kind of leasing and comprises set of various forms. Depending on sector of the market where leasing operations are spent, allocate:

§ INTERNAL LEASING - all participants of the transaction represent one country;

§ EXTERNAL (INTERNATIONAL) LEASING - participants are in the different countries. The seller of property can be in one of these countries or in other state.

There are various schemes of leasing transactions:

DIRECT LEASING. The manufacturer of the equipment will independently hand over property in leasing. Leasing transactions have not found a wide circulation since at increase in leasing operations the manufacturer, as a rule, will create the leasing company in such kind.

RETURNABLE LEASING, finding more and more wide application. The enterprise (the future receiver) has the equipment, but it (he) does not have not enough means for industrial activity. Then it finds the leasing company and will sell to it (her) the property, and last, in turn, will hand over it (him) in leasing to the same enterprise. As a result of realization of such scheme the enterprise has money resources which it can direct, for example, on updating of turnaround means. And the contract is made so, that after the termination(ending) of term of its(his) action the enterprise has the right of the repayment of the equipment and by that restores on it (him) the property right. This kind of leasing first of all will interest the enterprises which are experiencing difficulties with financial resources. It is favourable to them to sell property of the leasing company, simultaneously to conclude with it (her) the leasing contract and to continue to use the same property.

SEPARATE LEASING, or leasing with additional attraction of means, or leasing partially financed by leasing supplier. It is the most complex version of leasing since it is connected with multichannel financing and it is used, as a rule, for realization of expensive projects. Its distinctive feature is that leasing supplier, buying the equipment, pays from the means not all sum but only a part. It takes other sum in the loan from one or several creditors. Thus the leasing company continues to use all tax privileges which pay off from full cost of property. One more feature of this kind of leasing is that leasing supplier takes the loan for the certain conditions which are not so characteristic for domestic financial-credit attitudes. The borrower - leasing supplier is not responsible before creditors for return of the loan, it is repaid from the sums of leasing payments. Therefore, as a rule, leasing supplier makes out in favour of creditors the mortgage on property before repayment of the loan and concedes to them the rights to reception of a part of leasing payments on account of repayment of the loan. Thus, the basic risk under the transaction creditors - bear banks, the insurance companies, investment funds or other financial establishments, and as maintenance of return of loans leasing payments and property handed over in leasing serve only.

REVOLVING LEASING or leasing with consecutive replacement of the equipment is used, when leasing receiver on technology the various equipment consistently is required. In these cases according to conditions of the leasing contract leasing receiver gets the right after the certain term to exchange rented property for other object of leasing. Often leasing is carried out not directly, and through the intermediary. Schematically it looks so. There is the basic leasing supplier which through the intermediary, as a rule, also the leasing company, will hand over the equipment in leasing receiver. Thus in the contract it is provided, that in case of time insolvency or bankruptcy of the intermediary leasing payments should act to the core leasing supplier. Similar transactions have received the name subleasing.

Hire Purchase

Hire purchase involves paying for equipment in installments. The business will not own the item until all the payments have been made. It usually works out more expensive to buy an item on hire purchase than paying all at once but it does mean that the business doesn't have to spend a large amount of money at once.

Business hires the equipment for a period of time making fixed regular payments. Once payments have finished it then owns the piece of equipment. Hire purchase is different to leasing in that the business owns the equipment when it has finished making payments. With an equipment lease, the equipment is handed back to the leasing provider.

Equity

Equity finance is the sale of a share in the company to a third party. The third party becomes an owner of the business.

Equity can be provided by individual investors, venture capital companies, joint venture partners, and the `sweat equity' (this is intellectual value and owners' equity) and capital contribution of the founders of the company.

Equity providers are more interested in the growth potential of the company. Their objective is to invest an amount now and reap the rewards of a 5 to 1, or even 10 to 1, pay off in three to five years.

Since investors have different objectives to lenders, the factors they evaluate in determining whether to invest are also different.

Growth potential is based on the quality of the company's management, product brand strength, barriers of entry to competitors and size of the product's market.

And in the conclusion, some words about Government Finance

The government and the European Union provide help to businesses for the following reasons:

· Protect jobs in failing/declining industries.

· Help create jobs in areas of high unemployment.

· Help start up new businesses.

· Help businesses relocate to areas of high unemployment.

Some of the main sources of funds are:

· European Structural Fund

· Assisted Areas

· Regional Selective Assistance

· Small Loans Guarantee Scheme

3. Advantages and disadvantages of external sources of business financing

Whatever form of activity you are going to find yourself involved in, finance is going to be a concern. You need to be able to understand the advantages and disadvantages of each of the sources of finance that a business could use.

Here bank credit, shares and bonds will be observed in detail.

Bank credit

Today bank crediting is the basic source of external financing of projects in sphere of the real estate. In comparison with other sources (issue of shares, the bonded loan), to advantages of the bank credit experts carry relative simplicity of technology and an opportunity of reception of financial resources under the scheme considering concrete needs of this or that project on the sum and terms. However, thus the bank substantially (though and in smaller, than at partnership with co-investor) supervises a course of realization of the project and observance of a principle of target use of the financial resources given within the limits of the credit agreement, frequently interfering in administrative functions of the developer.

Other advantages and disadvantages of bank credit are:

+:

§ The state registration is not present; therefore this kind of financing is easier than a share issue and bonds.

- :

§ Receiving of the big long-term credit is actually unavailable

§ Necessarily presence of the mortgage and other maintenance of an expense for registration of the mortgage

Shares

Generally speaking, advantages and disadvantages are:

+:

§ There are no present obligations on payment of percent and return of the involved means

-:

§ Loss of the full control over the enterprise

§ The maximal openness is necessary, a transparency of activity of the enterprise

§ In some countries it is impossible to involve a greater sum of means by share issue

Now advantages and disadvantages of financing by a share issue will be observed when the strategic investors, financial investors and private investors are taking part.

By the positive moments of attraction in the company of the strategic investor concern:

o The strategic investor can transfer the enterprise the best practices and a know-how;

o The strategic investor is aimed at development of long-term cooperation with the enterprise;

o The enterprise can get access to the new markets and trade channels of the partner;

o The enterprise and its strategic partner can achieve synergic effect as a result of industrial integration;

o Strategic investors are ready to pay higher price for actions of the enterprise, than other investors.

At the same time, there is a number of negative consequences of attraction in the company of strategic investors:

o The enterprise should imagine and divide precisely the purposes of the strategic investor (frequently these purposes will not completely be coordinated with the purposes of management of the company);

o The essential share belonging the strategic investor in the share capital of the company, makes the control over it also can lead to change of the top management;

o Displays of distinctions in cultural and business traditions between the strategic investor and administration are possible;

o Search of the strategic investor demands significant expenses of time and means.

Speaking about financial investors, it is necessary to note their following positive features:

o Financial investors usually do not interfere with questions of operative operation of business;

o Financial investors are a source of the intermediate term capital for the enterprise;

o The financial investor usually owns a small share in the share capital of the company that allows its management to keep the control over the enterprise.

At the same time, it is necessary to note negative features of the given category of investors:

o The financial investor is not the expert in the given branch and consequently (know-how) for the enterprise cannot be a source of technical knowledge;

o Financial investors demand high norm of feedback from investments;

o Financial investors usually “realize the investments” (sell actions) after 3-5 years. For this purpose presence of the thought over strategy “an output from the company” is required, that is represented problematic enough in conditions of low-liquid market;

o Realization of investments by the financial investor is accompanied by a long preparatory stage during which the estimation of the investment offer and quality of management are spent, check of due conscientiousness (due diligence), the analysis of the financial reporting, the market and production of the enterprise.

Search and the coordination of conditions with investor is long and expensive action, thus at an initial stage of search of the investor the enterprise is compelled to bear expenses.

As to the investments which are carried out by private investors during public accommodation of securities here it is necessary to note the following positive moments:

o Public accommodation of actions facilitates to the enterprise access to the capital in the future;

o Public accommodation of actions is a source of long-term financing;

o Public issue allows to define real market cost of securities of the company and gives an opportunity to realize a part of cost of the joint-stock property;

o The administration, by the general rule, keeps independence and the control over the company;

o Public issues do not mean annual payments of dividends without fail.

At the same time, concerns to lacks of the given type of investments that:

o The open accommodation of actions at a stock exchange assumes performance of some strict requirements, including on disclosing the information;

o The organization of public issue is connected with significant expenses;

o The price of placed securities depends on a conjuncture of the financial market during accommodation;

o The quoted companies are compelled to carry out a number of the strict requirements established by the legislation on securities and rules of a stock exchange.

Bonds

Here are the advantages and disadvantages of bonds:

+:

§ As a rule, maintenance is not required

§ Public credit history is formed

§ Significant sums of financing are involved

§ Long term of loan

§ Opportunity of flexible tax and financial planning

§ On greater sums manages more cheaply credits

-:

§ The openness, a transparency of activity of the enterprise

§ On the small sums release of bonds is expensive

§ Reception of a credit rating is required

LOAN or SHARE capital?

Choosing between loan and share capital, companies weigh various factors. Generally speaking, the loan capital is cheaper than share one for two reasons:

§ Companies can subtract percentage payments under loans from the sums which are a subject the taxation, while dividends paid on the action (or incomes which are distributed among shareholders) from taxes are not subtracted;

§ Obligations to holders of bonds and creditors should be paid before obligations to shareholders and as thus the first category takes up less risk, than last, companies can charge smaller rate of return on loaned means.

Though the loan capital has the advantages, it has one large lack - a high degree of risk. The company which is selling out the shares for attraction of the capital can go through some complex years, not paying dividends, and here the company, not capable to execute promissory notes under loans and bonds can be forced by creditors to declare the bankruptcy.

The share issue also has pluses and minuses. Payment of dividends can be postponed, and, century difference from creditors, it is not obligatory to holders of actions to compensate the last nonpayments in the future. However the share capital - concerning dear a source of financing as dividends are paid from the sum which have remained after payment by the company of surtax. Besides at sale of ordinary shares founders of the company should divide with shareholders both a control share holding, and the rights to the future proceeds. And still after powerful splash in demand for loans today more and more companies are taking hope on the share capital as a source of financing.

And in the conclusion other two issues concerning this topic can be observed:

INTERNAL or EXTERNAL financing?

Financing of the growth from own money of the company is especially attractive for one reason: it is not necessary to pay percent to the creditor. Therefore many firms put in business undistributed profit - the means which have remained firm after a covering of all charges and payment of taxes. One more way of an increment of the capital due to own means to which some companies resort, is a realization of actives. But internal sources of financing are not so free-of-charge, the made costs are connected with them. So, the company can appear is more favourable to enclose undistributed profit in any external projects, rather than to use it for internal financing. The majority of the companies up to any degree depend on external financing. The question consists not in more often, whether to use external sources of financing, and in that, how many money it is necessary to involve, what way and when. Answers to these questions define structure of the capital of firm, that is a parity of loan and share capital.

SHORT-TERM or LONG-TERM financing?

finance debt obligation business

Choosing between short-term and long-term financing, the companies are guided by a principle of conformity, that is recognize that time of loan of means should coincide approximately in due course when these means will be spent. Differently, if you borrow money for short-term objectives, you should plan their return to so brief terms to not break balance between inflow and outflow of money. In the same way, when you plan realization of any long-term project, it is necessary to provide its financing from a long-term source to stretch term of return.

4. Supporting of the business in Russia

Business Financing in Russia

The essential role in financing of business activity is played by the state.

Organizational structures of support of business today are presented first of all by the State committee of the Russian Federation on support and development of small business, Federal fund of supporting of small business, regional funds, agencies, centers, etc. Federal and regional levels on the unions, associations, and other public associations of small enterprises are acting more and more actively now.

The system of commercial and industrial chambers possessing in significant potential in sphere of support of small businessmen has essentially become stronger. The second group of measures of support of business is made by various funds, sources of their financing, levers and stimulus both interbranch, and regional influence.

In development of business the essential role is played by regional system of regulation and support of small business. Forms and methods of realization of regional policy concerning small business proceed, on the one hand, from the measures accepted at the state level, on another - are defined by problems of development and specificity of each concrete region.

Great values in system of operating influence concrete forms and methods of mutual relations of administration with business have the mechanism of its support. One of the basic forms of the help in development of business, especially at an initial stage, - granting to subjects of business of credits. Credits can be given by directly administration from the budget and inappropriate means, or through banks, including by way of individual share, proceeding from expediency of development in territory of this or that sphere of business.

The important sphere of regulation is application of financial methods concerning those market structures which work with the enterprises of small business. Here decrease in the rate of the taxation of the organizations financing small enterprises, granting by it from local administration of financial guarantees can be applied. As guarantees by administration financial assets of the budget, objects of the municipal property, the real estate can be used.

The purpose of the state programs is maintenance of favourable conditions for development of business on the basis of improvement of quality and efficiency of measures of the state support at a federal level. Thus it is necessary to allocate the prime measures providing achievement of these purposes:

§ An openness both at formation of a state policy of support of business, and at its realization: presence of the full and public information on the maintenance of concrete measures of the state support, an establishment of the open procedures of distribution of means, the public reporting about use allocated for support of business of means and activity of corresponding state institutes;

§ Taking to consideration of national, regional and historical features; encouragement of crafts, national crafts, collective and family forms of the organization of enterprise activity, self-employment;

§ Gradual transition from state regulation of separate aspects of activity of business to self-regulation through the enterprise unions and associations;

§ Significant expansion of the rights and opportunities of subjects of the Russian Federation and local self-management in sphere of the state support of business at preservation of unity of the strategic purposes, legal base and information space;

§ The accelerated development of modern credit-investment mechanisms - leasing, specialized investment institutes of venture investments and so on;

§ Use of property of the inefficient and insolvent enterprises as a source of resource maintenance of business and creation of objects of its infrastructure;. Formation of an information network, expansion of an information field for the businessman; creation of the global information network accessible to any businessman containing data of business character about laws, taxes, competitors, clients, a condition of the market;

§ The organization of regular researches on problems of business with the purpose of an objective estimation of a condition of this sector of economy, tendencies of its development and preparation of recommendations on updating the state support of business;

§ Substantial improvement of system of the account and the state statistics of business;

§ Maintenance of protection of businessmen from influence of criminal structures;

§ The organization of the propaganda and educational campaign directed on stimulation of activity of business, preparation of the population for employment by own business, association of businessmen to branch, regional, professional and other attributes, formation of corresponding public opinion about businessmen.

Here it is necessary to say that in support of business in Russia not only the government of the Russian Federation is engaged, but also the international organizations.

The international Bank of Reconstruction and Development has developed the project of support of the Russian small enterprises on $200 million.

In 1995 the World Bank and the European Reconstruction and Development Bank have begun realization of the joint Project of support of the enterprises within the limits of which the demand line of credit at a rate of $300 million for competent banks with a view of loaning up means to private enterprises has been opened. After crisis 1998 the project has been re-structured, and the World Bank 2001 of the European Reconstruction and Development Bank also has renewed the operations for realization of the given project in the beginning continues to give financing, first of all, to the small and average enterprises through competent Russian banks. Means of the specified 2 demand lines of credit are spent within the limits of separate projects. The re-structured demand line of credit of the World Bank is opened for the sum of $200 million. The project pursues 2 basic purposes:

§ granting to private enterprises of intermediate term financing on the basis of action of market principles for realization of capital investments and receptions of additional means of a working capital, helping thus to provide access of such enterprises to the finance necessary for expansion of the activity and growth and-or for re-structuring with a view of manufacture of competitive production

§ rendering of assistance to the basic group of commercial banks for start of mechanisms of granting of urgent credits to private enterprises.

The list of sub-projects of the Project of support of the enterprises includes 43 sub loans for a total sum of the allocated means in volume $63, 13 million, from this sum $50,712 million (including a share of the European Reconstruction and Development Bank) has already been mastered. In the geographical plan, projects are realized practically in all territory of the Russian Federation in 21 regions. From the general number of the approved projects of 33 % of projects it is realized in Moscow and the Moscow area that represents 34,73 % from a total sum of the approved loans. Other addressees of significant volume of means (more than 1 million US dollars) from means of the Project (in decreasing order) are St.-Petersburg, Omsk, Tomsk, Yekaterinburg, Tyumen, Vologda, the Nizhniy Novgorod area and Primorye Territory.

The mechanism of the program: private enterprises can address in the selected private banks which are taking part the program of the Project. For participation in the given project the specified banks should satisfy to the criteria certain within the limits of the Project of development of financial establishments. During realization of Project of development of financial establishments to banks there is a support with a view of their institutional developments by development together with each bank of Programs of remedial measures, considering features of each bank, and carrying out of monitoring of their realization. Banks, for which such program has been developed, carry out it, and the Ministry of Finance gives to them access to credits within the limits of the Project of support of the enterprises.

The World Bank makes the analysis and either approves, or rejects applications for reception of the loan according to procedures of the Project of support of the enterprises. Banks use proceeds of credit of the Project for financing the enterprises only after representation and reception of the statement of contracts and documents under the loan for financing concrete projects.

Conditions of the loan:

§ The maximal sum of the loan is $5 000 000 (can be limited on 10 % from the capital of participating bank). The minimal sum of the loan - $200 000.

§ All loans are given in US dollars. The enterprise takes up risk of an exchange of a foreign currency. However payment under contracts within the limits of the Project can be made in any currency specified in a management of the World Bank, describing procedures of an expenditure of means.

§ The interest rate and the commission are established by participating bank in conformity with demand and a competition in the market.

§ Conditions of the loan: it is given not less than for 1 year and no more than for 5 years, including a grace period established no more than for 1 year.

Also the European Reconstruction and Development Bank has given the program of preparation of the financial and administrative staff.

To sum up, we can see that the following foreign and domestic sources of financing can be accessible to the Russian enterprises:

§ Russian and foreign banks basically as sources of credit resources;

§ Foreign and Russian strategic and financial investors investing the actions of the enterprises;

§ Stock exchanges as intermediaries at the open accommodation of actions and bonds;

§ International financial organizations (for example, the International financial corporation, the European bank of reconstruction and development), giving financing as in the form of credits, and investments into actions of the enterprises;

§ International markets of the capital (are accessible only to the best Russian enterprises which meet rigid requirements of the international investors and presume to itself the high costs connected with an output on the international markets);

§ Private investors;

And in the conclusion it is necessary to say, that the existing legal system of Russia still cannot provide protection of the rights and interests of businessmen.

The official right has appeared to turn off from the real processes occurring in a social and economic life of Russia.

Forms and methods of state regulation of investment activity should be more flexible and do not suppose different interpretations. They cannot be exclusively forbidding or resolving, and should be directed on the maximal cooperation with subjects of investment activity, provide reception of mutual benefit, both to the state, and the investor.

5. Conclusion

It is obvious, that character and conditions of financing will differ depending on to what of the set forth above sources the enterprise in searches of investments will resort. The choice the enterprise of a source of financing will be to depend, in addition, on its financial position, long-term objectives of development, personal preferences and interests of the top management, and also from external economic conditions. To make a correct choice, management of the company should analyze following factors:

§ Presence in the market of necessary financial products;

§ Cost of financing;

§ Terms and conditions of financing;

§ Time frameworks;

§ The Maintenance necessary for attraction of means;

§ Terms necessary for the organization and reception of financing;

§ Questions of the control over the enterprise depending on the chosen source of financing

However, not each financial tool can it is accessible or comprehensible to the given Russian enterprise as in the Russian market there is a number of the conditions limiting inflow and the offer of the capital.

But within last 20 years with development of the share markets and investment activity a set of new complex financial tools appeared. So, the choice, which source of business financing to use, is for company and its financial management.

Sources:

1. «Финансовый менеджмент»: Учебник для вузов. / Под ред. Проф. Г.Б. Полякова- М., ФИНАНСЫ, ЮНИТИ, 1997.

2. http://www.investmentrussia.ru

3. http://www.investopedia.com

4. http://www.iib.qld.gov.au/business/Finance/External_Finance.asp

5. http://www.ioe.ac.uk/TeachNetUK/dsalbstein/sources/external.htm

6. http://www.investmentrussia.ru/eng/consul/manual.htm

7. http://cd.xplait.com/Untitled-122.htm

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