From this lecture, we will enter the second module of study, discussing financing and management issues.

You may feel a little strange, why should financing and management, two seemingly different issues, be discussed in one module?

That's because these two questions are essentially related to finding money.

It’s just that financing means companies find money from outside, while management means companies find money from inside by reducing costs and increasing efficiency.

In this lecture, let’s first talk about the problem of finding money from the outside.

There are two main ways of financing a business.

One is debt financing, such as borrowing from a bank, and the other is equity financing, which is looking for investors.

These two types of financing methods correspond to debt and equity on the right side of the balance sheet in financial statements.

Why do companies need financing?

Generally speaking, it is to invest in a new project.

For example, if Disney wants to build a new theme park in Beijing, it will require more than 30 billion yuan. Such a large amount of capital generally requires external financing.

What issues does Disney need to consider?

First of all, should these 30 billion be used for debt financing or equity financing?

In financial management, this is called the "capital structure" problem.

Secondly, if debt financing is used, such as bank loans, should it be a short-term loan or a long-term loan?

You may say that these two questions are easy to answer. Whichever method is cheaper can be used.

You are right, trying to use the cheapest money is indeed an important principle in financing decisions.

In financial terms, it is to keep capital costs as low as possible so as to maximize economic profits.

But if you ask a financial expert, he will say that although using cheap money is important, it is not the most important principle in financing decisions.

The “matching” we are talking about here has two meanings: one is matching in terms of time, and the other is matching in terms of risk.

Let’s talk about the matching issues of these two dimensions separately.

1. Term matching As you must know, asset-heavy projects usually involve bank loans.

Generally speaking, the interest rate on short-term debt will be lower than that on long-term debt because the loan period is short and the risk borne by the bank is relatively small.

In other words, short-term loans are cheaper than long-term loans.

So if you look at it from a cost of capital perspective, it seems like all businesses should use short-term loans.

But is this the reality?

According to statistics, more than 60% of China's listed companies have long-term debt.

Why do companies choose long-term loans when they know that short-term loans are cheaper?

The reason is that the maturities of short-term debt and long-term investment projects do not match.

What are the characteristics of the cash flow of a long-term project like Disney?

That is, the first few years are the investment period, and the cash flow is usually negative. Only in the later period, when the project is operating normally, will it start to generate more positive cash flow.

Based on the experience of Shanghai Disney Amusement Park, it takes about 11 years from construction to opening to cost recovery.

If Disney uses short-term debt of 1-2 years in order to save some interest costs, then Disney must pay off the debt within 2 years, and the cash flow of the amusement park may still be negative or very little within 2 years, depending on the project itself.

, which cannot support the interest and principal of the loan at all.

The practice of using short-term debt for long-term projects is called "short-term loan and long-term investment" in financial management.

Many companies use short-term loans for long-term projects because they are cheap and easy to borrow.

But short-term lending and long-term investment is a very dangerous financial operation.

You must remember.

This is like saying that you borrowed 5,000 yuan from an Internet platform at the beginning of the month to buy a new mobile phone. The money has to be repaid in the middle of the month, but your salary is not paid until the end of the month.

What should I do if the loan is not repaid by the middle of the month?

You might say, then find a way to borrow another amount of money, use the newly borrowed money to pay off the old debt of 5,000 yuan, and wait until the salary is paid at the end of the month to repay the new loan.

You are right. Many companies are indeed using this method of "borrowing new and repaying old" to recycle funds, especially those with strong financing capabilities and good banking relationships.

Once one company gets a taste of the benefits, other companies will follow suit, leading to the spread of short-term lending and long-term investment.

Domestic scholars studied A-share listed companies from 2008 to 2015 and found that an average of 32.9% of companies per year engaged in this kind of "short-term lending and long-term investment" behavior.

What are the risks of "short-term loan and long-term investment"?

When the macroeconomy is good, risks are invisible, but when the economy is in recession and banks tighten money, risks and hidden dangers are exposed.

In the past two years, small loan companies and P2P Internet finance have often exploded, mostly triggered by redemption crises caused by "short-term loans and long-term investments".