Sources of Capital for Businesses (II)
Unsecured Stock — Unsecured loan stock is a source of long-term finance. It tends to be more costly than secured stocks as it carries higher risks.
Medium-term Source — Generally for more than one year, for example, bank loan (especially overdraft facilities). They are usually related to the purchase of current assets and fixed assets, The loan tenure extends for as long as 5-10 years. However, overdrafts regardless the previously agreed limits, take the chance of being called in a short notice and are therefore regarded as current liabilities. Besides, there is always a risk of over-ridding pressure from Treasury (through Central Bank Malaysia) that could emphasize the latest credit squeeze.
Mortgage — Normally raised on brick-and mortar assets, that the fixed annual interest (even without capital repayment) would pose some burden in difficult years. There may also be hire-purchase facilities for buying fixed assets, sale and lease-back opportunities, and equipment leasing.
Short-term Source — A temporary finance to tide or provide the buffer to level-out fluctuations in the working capital. Commercial banks would be the first supplier of short-term capital. A bank overdraft facility with daily interest of a percentage plus the bank’s base lending rate os a more versatile form of short-term capital.
Loans — The amount depends on:
- The organisation’s profit record;
- The collateral or security offered;
- The cash flow ability to repay the loan with interest within the date(s) agreed upon;
- The purpose for which the loan is required.
Trade-Bills (bills of exchange) — With regard to imports and exports. Normally self-liquidating over 30 days to 180 days. Hassle-free and are short-term borrowing from commercial banks or similar source.
Creditors — A short-term fund from suppliers and vendors. The credit terms provided depend on:
- An organisation’s financial policy;
- The relative size of the organisation involved;
- The importance of reciprocation;
- Established reputation;
- Any silimilar factors that subconciously or conciously need to be considered.
Cash Capital from Buyers
