What will be the impact of financing?

I. Analysis of financing costs

The cost of financing is the cost of using funds, including financing costs and usage costs. Financing costs (including agency costs and rent-seeking costs) are the various costs incurred by an enterprise in the process of raising funds, while usage costs (e.g., dividends and bonuses) refer to the remuneration paid by an enterprise to the provider of funds for the use of funds. Since financing costs occur almost simultaneously with the amount of financing, they should be deducted from the amount of financing. Financing cost is a determinant of financing efficiency and varies inversely with financing efficiency.

The financing of small and medium-sized enterprises should be based on the principle of minimizing the financing cost, and choose the most favorable and preferential financing tools for small and medium-sized enterprises as far as possible. Small and medium-sized enterprises not only have the problem of difficulty in listing, but also even if the listing of the problem of high transaction costs and diseconomies of scale, which makes the small and medium-sized enterprises of stock financing is even more inefficient. This is because the handling fee, credit evaluation fee, notary fee, audit fee, etc. for issuing shares are all fixed costs, and these costs will not be reduced accordingly because of the small scale of issuance. According to statistics, the actual issuance costs of the enterprise listing accounted for 1.84%-3.98% of the issue amount.

In terms of debt financing, because of the tax shield effect, its financing cost is low compared with equity financing. Since the central bank of China has set a benchmark lending rate for commercial banks and the lending rate can only be fluctuated within a small range, the lending rate obtained by small and medium-sized enterprises (SMEs) is not high, but this does not mean that the efficiency of debt financing is high. In fact, because of government regulation of interest rates and financial service charges, it limits the risk-pricing ability of banks to lend to SMEs, thus affecting their incentive to extend loans to SMEs. In addition, restricting financial institutions from charging for financial services also dampens the incentive of financial institutions to investigate and collect information on SMEs, which in turn affects their incentive to provide credit and other financial services, which inevitably leads to a significant reduction in the amount of credit funds available to SMEs, and in fact to a low level of financing efficiency that neither side is willing to accept.

The cost of private financing is generally referred to as the black market interest rate, which is high based on the high risk of private financing. Commercial credit is a kind of "natural financing", it accompanies the commodity transaction naturally, no formalities, generally no conditions, if there is no cash discount or the enterprise does not give up the cash discount, as well as the use of non-interest-bearing notes payable, the use of commercial credit financing does not incur the cost of financing. However, since the funds raised by commercial credit are generally smaller, the actual total cost of commercial credit is greater than that of internal financing in terms of the long-term development of the enterprise.

Internal financing is a way for a company to convert its own after-tax profits into an accumulation, which is essentially an additional investment in the company. This type of financing does not seem to pay on the surface, but in essence there is still a financing cost - opportunity cost. If a firm uses its internal accumulation for other investments, the investment return is the opportunity cost of retained earnings. Overall, internal financing has the lowest financing cost among the various financing methods.

Two, capital utilization analysis

Capital utilization can reflect the financing efficiency from two aspects.

(a) the rate of funds in place, that is, the amount of funds raised by financing and the ratio of the amount of funds expected to be raised

higher rate of funds in place, then the enterprise will be the degree of financing applied to the operation of a high degree of the corresponding financing efficiency is high. Endogenous financing has always been an important way of financing for SMEs with a high capital availability rate. Considering the capital needs of the enterprise and the tax avoidance effect of personal income tax, the retained earnings of the enterprise will generally remain in the enterprise and continue to be invested in production. For debt financing, it is very difficult for SMEs due to a variety of factors such as the size of the enterprise, its economic strength, the quality of its leaders, its capital structure, its credit rating and its operating efficiency. Loans from banks and other financial institutions are the largest and most important exogenous source of debt financing for SMEs, but the credit strategies of the four major state-owned banks are obviously in favor of state-owned enterprises; while commercial banks, credit unions and other financial institutions, out of risk considerations, have implemented a "credit rationing" policy for SMEs, so that many enterprises can only partially obtain the loans they apply for, and even some enterprises have been rejected by the banks. Many enterprises can only get part of the loans they apply for, and some of them have even been rejected many times by banks and credit unions and other financial institutions, so the availability of funds has always been low.

(2) Capital utilization rate, that is, the ability of enterprises to effectively digest funds

The higher the capital utilization rate, the higher the efficiency of enterprise financing. Theoretically, due to SMEs' thirst for funds, funds obtained from various channels will be quickly utilized, but underutilization of funds due to the following two circumstances cannot be ruled out: listed SMEs are misled by listed companies' preference for equity financing, and even if there is no short-term need for funds, as long as they meet the conditions for issuance of additional shares, they will also choose to increase the issue and incorporate a large amount of funds. At the same time, due to the minimum capital size requirement, the size is generally higher than the capital needs of SMEs, making the sector's capital unable to be truly utilized. Due to the contradiction between the centralized nature of financing and the decentralized nature of investment, it will also lead to a significant reduction in the utilization of capital. Does not rule out the phenomenon of idle funds due to the long continuation of the financing process, so that the original market opportunities and the enterprise passed by, and for the time being, there is no other investment opportunities.

Three, solvency analysis

Solvency is an important indicator of the efficiency of capital allocation, which not only reveals the effect of capital recycling, but also reflects the enterprise's economic performance, scale, development potential, credit status and management status. The better the economic performance of the enterprise, the larger the scale, the larger the development potential, the better the credit status, the higher the overall quality of the management level, the greater the solvency of the enterprise, the higher the financing efficiency. Solvency and financing efficiency change in a positive direction. Equity financing, because it does not require repayment of principal, does not generate various risks and adverse effects arising from the inability to repay debt. Therefore, equity financing for SMEs can be considered to be financing efficient when solvency is taken into account. Internal financing has the same nature as equity financing in this respect, i.e. it does not require repayment of principal. For bond financing, on the other hand, all kinds of risks and disadvantages of not being able to repay are brought about by debt financing, and these risks and disadvantages will lead to a reduction in the efficiency of financing, and the extent of this reduction in the efficiency of financing varies from enterprise to enterprise, and the efficiency of SMEs is low in this respect. In fact, one of the main causes of SMEs' debt financing difficulties is the liquidity crisis, and one of the main reasons why banks are reluctant to lend to SMEs is their high rate of failure or closure. According to the estimates of some bank managers, nearly 30 per cent of SMEs in China will disappear within two years; nearly 60 per cent will disappear within four to five years. The high rate of closure of SMEs obviously exposes banks that lend to them to greater collateral risks. In view of this, the cost of collecting and analyzing information for banks to lend to them will also be higher, which naturally makes banks reluctant to lend to SMEs. In addition, the high default rate of loan repayment is also an important reason why banks are reluctant to provide loans to SMEs. In a survey of China's urban commercial banks found that the default rate of small and medium-sized enterprises is higher than the default rate of large enterprises.

Four, the analysis of the freedom of use of funds

Enterprises have different degrees of discretionary funds integrated in different ways. The higher the degree of free disposal of funds, the higher the efficiency of financing. Internal financing funds have the highest degree of freedom among all financing methods. The degree of freedom of funds from stock financing is also higher, and in practice, the board of directors of a listed company can change the direction of funds at will as long as it is disclosed in a timely manner. The degree of freedom in the use of bank credit financing funds is lower than that of stock financing, because in the loan agreement, there are generally clear provisions on the direction of the use of funds, with clauses on penalties for non-compliance. SMEs are limited by poor financing channels and have to accept the strict constraints imposed by banks, including the reserve system, credit compensatory balances, and turnover agreements. For large or recurring loans there are also supervisors for day-to-day monitoring, so debt financing is an inefficient way in terms of freedom. Lenders of private loans are more concerned about the return of the loan and the high interest rate, pay little attention to the process of the use of funds, and due to capacity constraints can not be tracked and monitored, as opposed to bank credit, the degree of freedom of enterprises to private loan funds to a higher degree of discretion. Commercial credit does not involve the flow of funds, and occurs in special transactions, so the lowest degree of freedom in the use of funds.

V. Financing Risk Analysis

Financing risk refers to the possible losses that the users of funds may suffer by using funds from different sources. When the financing risk is small, the financing efficiency is high. Since both equity financing and internal financing do not need to repay the principal, are not subject to the limitations of the period of use, and do not generate various risks and adverse effects arising from the inability to repay the debt, the financing risk of the two is small relative to other debt financing methods, but from the point of view of the loss of control, the risk of equity financing is much higher than that of internal financing. Private lending is more risky for the lender of funds due to the lack of formal legal and regulatory protection and thus the inability to resort to legal protection. However, from the perspective of the borrower of funds, the risk of private financing is lower than that of bank credit financing. Bank credit borrowing and repaying money are handled in accordance with the agreement and regulations, and late repayment will be fined, frozen deposits, and no subsequent loan funds will be available in the future. Commercial credit financing is a shorter period, if you can not repay the accounts payable in a timely manner will lose credibility, it is difficult to reach future transactions, so its financing risk between bank credit and private financing.