Financing Methods Used by PICC
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The PICC group is a state-owned company dealing with insurance. PICC is one of the largest insurance companies in China. The company uses internal financing as its financing method, which includes the use of profits it earns, rather than other external sources of funding. Internal financing is preferred by majority of investors because it spearheads international development, unlike external financing, which constitutes extra benefits. For a company to obtain loans from lenders, it must provide proof that it has enough sources of internal finances. Failure to prove this to external lenders may result in failure to get any finances. Internal financing has three main sources. These include: funds obtained from paying off debts, deposits, and stock, Unallocated profits and income from sale of the property (grounds, debts, buildings, patents). Internal financing is less expensive as compared to external financing because there are no transaction costs.
Advantages of external financing are as follows. First, it is not influenced by any third party such as debtors. Second, it does not have to pay for interest payments because it finances itself through profits it makes. Third, capital for internal financing is readily available because they get it from their profits. Fourth, internal financing spares the credit line. Lastly, internal financing does not suffer from controls regarding creditworthiness (Jones & Moens 2009).
Disadvantages of internal financing are as follows. First, internal financing is flexible as compared to external financing. This is because companies using internal financing may make insufficient profits, and in such cases, the company will suffer from insufficient funds to carry out their operations. Second, it is expensive because it is not tax-deductible. Most of the finances obtained from internal financing are crude profits, which are usually heavily taxed (Liaw 2007). Third, it sometimes suffers from shrinking of capital and it does not have an increase of capital. Lastly, internal financing has a limited volume as compared to external financing. This is because markets have more capital than the inside of a company.
Apart from internal financing, PICC can use external financing to finance and cater for the costs of operations. On the other hand, external financing is discussed in a context of a business being involved in global activities with typical ways of obtaining finances that it can use. Imports and export specific techniques can be added to these ways. For instance, buyers can get approved credit in countries that cannot simply enter capital markets of the world or to products intended for export. External financing can be administered to a company in three distinct packages depending on company’s needs: it can be before storage, during the time span of storage, and after delivery (American Academy of Political and Social Science & Roorbach, 1999).
Financing before Delivery
Finances before delivery may be obtained either through client’s deposits or through pre-financing credits. Client’s deposits may be obtained if the company demands a certain percentage of the sum of the value of goods or services. The company communicates to its customers demanding for the deposit when the customer declares interest for the good or service. This method is highly efficient in cases where extensive period of time is needed to produce goods and services. It works perfectly for equipment and machinery. Often, the size of the deposit represents an acute size of total cost of the contract. Most companies work with 10 percent.
Companies also obtain funds before delivery through pre-financing credits. It is clear that the deposit given for a good before manufacturing is often insufficient to cater for the costs related to producing the product. Manufacturers must, therefore, seek other sources of financing the projects in order to reduce the big difference between invoicing and manufacturing. Pre-financing credits are often given by banks. These credits finance contracts, employment markets, factories, and equipments (Isaebd & Zhou 2011).
Financing during Storage
A practice of seeking contracts and orders for the business is called canvassing abrad. To be able to satisfy the rules of the acquired contracts, the corporation should set up bigger stocks of components, raw materials, and ready products. Most companies get the largest payment deadlines to finance the needs of the enormous working capital. Nevertheless, the efficiency of this mode of obtaining external financing highly depends on company’s negotiation abilities. In cases where setting up the largest payment deadlines does not work, companies are only left with the pre-financing option as the only means of financing the demands. The exporter in rare cases can, import raw materials at a lower cost by putting the ware house under custom. This aids to delay paying of taxes and fees.
Financing Needs after Delivery
After the manufacture of a product, funds are required to finance credit given to the foreign consumer during vending of consumer products and equipments. Companies seek funds from banks or other particular financial organizations. Some of the methods applied by companies to obtain funds to satisfy financial needs after delivery of the products to foreign countries include documentary credit, loans in foreign currency,commercial discount as well as factoring. The enlisted methods are discussed below in details.
Documentary credit refers to involving the bank of a consumer to pay the manufacturer against the surrender of documents that prove delivery of goods or services. These documents are then transferred by customer's bank against reimbursement in order for the customer to take ownership of goods. Thus, product provider defines the expenses of his product when the product has been delivered by this means and gives back to his bank the obligatory transport and commercial documents (Venzin 2009).
Foreign currency loans/advance in foreign currency enables financing intervals that make it possible to cover business operations through short term financial credits. The company obtains a loan equal to the amount of the value of invoice in the currency of this invoice. The company then sells foreign currency and rebuilds its returns, and consequently pays the loan back with the summation of customer's debit when they compensated it. Foreign currency loans are also associated with a benefit of also being a practice of covering the risks that come with foreign exchange (Zhongguo Jin Rong Chu Ban She 1990).
Commercial discount is a practice "when a bank makes a payment to the owner of a commercial effect earlier than its due date the sum of this effect, minus banking fees". It is clear that in this case, the commercial effect is anticipated by the bank. Credits like these make it possible for producers who have fixed their foreign customers with short-term deadlines to obtain the amount of their debit at the moment it arises. As much as this method has a high cost, it is efficient and it is, therefore, frequently used to obtain short-term funding by the majority of exporters.
Buyer’s creditisa method through which a company obtains external finances by receiving the sum of the invoice from the purchaser. The purchaser takes a loan from the bank and hands the funds to the provider. The provider is relieved from non-payment risks as well as any other related fees. Consumer’s risk is transferred to the bank by a producer . This type of obtaining credit is highly approved for transfer of technology and for the sale of products, which have relatively high costs.
Factoring method is used as a source of external financing when the company relieves itself from clearing consumer’s debts to a factoring company. The factor company becomes in charge of consumer’s risks repatriation by taking certain fee. The commission is calculated depending on the likelihood of risk occurrence and a certain factor of the value of the risk paid by the producer to the factor company. This method makes it possible to debts to be paid. It, therefore, gives multiple advantages to the seller.
Advantages of External Financing
External financing preserves resources. It gives room for use of internal financial services to perform other duties. A company can invest its money as a way of preserving funds if it finds an investment with higher interest rate. Second, external financing allows for growth even in a situation where a company would not hhave facilitated growth. Money is obtained from external sources unlike internal financing, which depends on its profits. Also, external funds are used to make large equipment purchases that would not have been funded by the company alone.
Disadvantages of external financing are as follows: it requires a company to give some part of its ownership to the sources of external funding such as stakeholders and investors. This can alter the original vision of the company due to sharing of ownership. Lastly, all external financers demand for a return, which comes in terms of interests. Interests might in the long-run be a burden to a company than it had been planned.
Goldman Sachs Group
Goldman Sachs Group is an investment banking firm based in America, which deals with securities, investment banking, financial services, and investment management. The firm provides asset management, underwriting services, acquisition and mergers advice, and prime brokerage to clients. It plays several roles such as a joint sponsor, joint global coordinator, joint book runner, and joint lead manager.
A joint sponsor is a manager, who is responsible for supervision of global public offerings. He/she are also responsible for coordinating activities of underwriters and lead managers. According to ACCME, a joint sponsor is a sponsor of a CME activity by one accredited and one non-accredited organization. Goldman Sachs is one of the companies that play a role in informing learners. It uses accreditation statement as a way of creating awareness to learners. According to ACCME, this activity has been planned and implemented in accordance with the essential areas and policies of the Accreditation Council for Continuing Medical Education (ACCME) through the joint sponsorship of the accredited provider and the non-accredited provider. Second, Goldman Sachs ensures that accredited providers are not charged fee charged for joint sponsorship.
Goldman Sachs ensures that all CME activities are in compliance with their accreditation requirements. ACCME states that people can make demonstrations in written documents. These materials are obtained from the files of accredited and non-accredited providers. Lastly, Goldman Sachs provides probation. Providers placed on probation may not necessarily jointly sponsor activities from CME (Brigham & Gapenski, 2008).
Joint Global Coordinator
Goldman Sachs oversees public offerings that are offered on a worldwide basis. It coordinates all activities related to sales and issuance occurring as part of the offering. Goldman Sachs works with some regional coordinators to accomplish the task. It also functions as an interface with the public and offering a reality. Goldman Sachs works closely with nations that are involved in public offerings to make sure that the terms of the offerings are fully complied to. Lastly, it strategically places other regional coordinators with whom it works in some geographic areas.
Joint Book Runners and Joint Lead Managers
As a book runner, Goldman Sachs performs duties of lead managers, underwriting, coordination in debts, hybrid securities of equity issuances. It lowers the risks through syndicating with other specific investment banks. Among all underwriters, the book runners are listed first among those participating in issuance. Book runners are in charge of books or else run them. Together with other book runners, Goldman Sachs manages security issuances. They are also known as syndicate managers or underwriters. Typically, one company runs the books, but now the joint book runners do the job.
PICC is a very big company in China that deals with insurance. The company uses internal financing method to fund its operations. Internal financing is gotten from the profits of a company and hence are readily available. It could also use external financing method, which comes from external sources such as loans from banks but at an interest. Goldman Sachs appears as a joint sponsor, joint global coordinator, and lastly, a joint book runner in the finance industry. These duties are directed towards using a better financing method.
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