Sources for Financing of Building Order

1. Lecture was elaborated with the help of grant project of Ministry of Education, Youth and Sports, FRVŠ n. 2005 „Innovation of Subject Financing of Building Order“ Sources for Financing of Building Order

2. Principle of Financing of Building Order Sources for financing Revenues from order Other own sources Advance payments Other resources Material Labour Delivery of building works (objects) Building order Machines, machinery Sub-supplies Inputs Production process Outputs 5. 1. 2020 2

3. Sources for Financing of Privat Building Order • Main sources for long-term financing can be divided into: • Internal sources (e. g. depreciation, profit) • External sources (e. g. long-term bank credits) Financing of Building Order

4. Internal Sources for Financing • Also called self-financing • Mostly create major part on financing of investments into fixed property • Internal sources for financing are: • Not divided profit • Depreciation • Long-term reserves Financing of Building Order

5. Not Divided Profit • Cumulated net profit after the fulfillment of tax duties, the creation of compulsory reserve funds and the satisfaction of duties towards owners • Not divided profit can be in the form of: • Not divided profit of current period • Not divided profit of past periods Financing of Building Order

6. Long-term Reserves • It concerns about the retained profit for the coverage of future risks or losses, about that we suppose that can happen • Their utilization and maximal amount is defined by the law about reserves • Mostly it concerns about reserves for repairs of the long-term property • Reserves create the tax acceptable cost item that decreases the tax base Financing of Building Order

7. Depreciation • Financial expression of annual decreasing of the long-term property value caused by its utilization • Depreciation belongs to the tax acceptable costs, it decreases the tax base • Depreciation creates a part of the product's price, then it influences returns Financing of Building Order

8. External Sources of Financing • Very often used by investors for financial coverage of new investment • External financing can better react on the needed property changes influenced by market situation • If costs for external sources are lower then profitability of total capital, there increases the efficiency of business by the increasing of the profitability of own capital • Disadvantage of the external financing it is higher amount of creditors that can have the interest in decision making in the company • It increases the debt of the company and there also increases costs connected with acquisition of external sources (interest, guarantee by own property) Financing of Building Order

9. Basic Capital • The capital deposit of owners into companies, minimal amount is defined by the business code (limited company, corporation) • All companies can increase their basic capital and by that to increase own (but external) source for the property coverage Financing of Building Order

10. Loans for the Real Estate Acquisition • Usual utilization of middle and long-term loans (in practice it concerns about loans with maturity longer then 5 years) • During decision making about the choice it is necessary to consider: • interest-rate level • guarantee • finality of the loan • way of the credit granting • way of the back-payment repayment Financing of Building Order

11. Middle-term Loans • Granted usually for the period longer then 1 year • Loan can be granted for the total budgeted amount, or the bank can require the participation, mostly about 20 % Financing of Building Order

12. Long-term Loans • Granted for the acquisition of existing real estate, the refinancing of existing middle-term bank loan or for newly realized real estate • Maturity is longer then 5 years, usually possible delay of payments • Necessary to solve the type of interest rate – variable or fixed – in the case of fixed also the period of fixation Financing of Building Order

13. Mortgage Credit (Loan) • Typical source used for acquisition of real estates (mainly for living) • Long-term loan • It is guaranteed by the right of lien for acquired real estate • Possible to use it for: • buying of the real estate • building up of new real estate • reconstruction, modernization and repair of the real estate • Advantages: • fast solution of (living) situation • minimal necessity of own sources • possibility to pay off the debt for long-time period • possible state support and possibility to decrease the tax base by the interest • low interest rate • possibility of combination with other available sources Financing of Building Order

14. Loans in the Frame of Building Savings • Intended mainly for financing of buildings for living • The interest is usually lower then in the case of other loans • Building savings system consists from two parts: • savings • grant of the loan • During savings phase the deposits are supported by annual state financial support (15 % from deposits p.a., maximally 3000 CZK p.a.) • Returns (interest) from the building savings are not taxable returns • Interest from the loan it is possible to use as a tax acceptable cost (decreases the tax base) Financing of Building Order

15. Leasing • It concerns about long-term lease of acquired property • Advantages: • financing with low amount of capital for long time • tax advantages – payments are tax acceptable costs • Disadvantages: • the owner of the acquired property is for the all time of leasing duration the leasing company • the leasing increase causes next costs for the property acquisition • The subjects of leasing can be: • buildings • administrative buildings • retail spaces • production and storage halls • movable property • vehicles • machines, machinery Financing of Building Order

16. Investment Grants • No repayable subsidy for directly delimited purpose • They are granted by: • state (grant programs of particular ministries) • municipal authorities • EU • According to the purpose there exist: • operational grants • investment grants • Each grant program has directly defined conditions that are controlled. In the case of violation of conditions is the receiver of grant penalized, or he must to return the grant. • Many grants (mainly from EU) are conditioned by the financial participation of the receiver of grant. • There also can exist commitment grant, when the receiver finances the project from own sources, the grant is paid after finishing of works and after checking of grant conditions. Financing of Building Order