Business finance- Intermediate sources of Capital
-
Upload
felyn-denise-jover -
Category
Business
-
view
1.174 -
download
2
Transcript of Business finance- Intermediate sources of Capital
Intermediate Sources of Capital
Intermediate Sources of Capital
Short – term Financing
Business Finance Functions
Intermediate – term Financing
Long – term Financing
Intermediate Sources of Capital
Short – term Financing
Business Finance Functions
Intermediate – term Financing
Long – term Financing
• Short-term capital is funds that are borrowed for less than one year.• Used when companies have expanded
their initial capital• Occurs when one has neglected the task of
preparing a projected cash flow budget statement• This include Trade credit obtained from
creditors.
Intermediate Sources of Capital
Short – term Financing
Business Finance Functions
Intermediate – term Financing
Long – term Financing
• Early-stage capital (intermediate capital) is funds to be paid back within a period of five years.•Need arises as need for working capital
increases.•Used for small expansion activities. • This includes leasing and medium term
loans.
Intermediate Sources of Capital
Short – term Financing
Business Finance Functions
Intermediate – term Financing
Long – term Financing
• Covers long-term projects lasting longer than five years.• Used for fixed assets and real estate
purchases, expensive machinery, and franchise financing.• Used for major expansions or the acquisition
of expensive equipment.• This includes long term loans and share
capital.
Intermediate Sources of Capital
- Intermediate term financing or Intermediate Source of Capital. Refers to borrowings with repayment schedule of more than one year but less than ten years.
Intermediate – term Financing
Intermediate Sources of Capital
Features of intermediate-term financing
1. Maturity:The maturity of intermediate-term financing is one year to five years. Sometimes the finance period can be exceeding up to seven or ten years.
2. Size of loan:The size of loan is generally small. Because the main sources of intermediate-term financing are commercial bank and insurance company. Normally commercial bank does not finance to the company for expanding their business.
3. Users of term financing:Generally small, middle and large businesses use this loan. Specifically commercial bank does not finance which business can not excess the capital market.
Intermediate Sources of Capital
4. Objective of credit:The objective of this loan is to expand capital, machinery or replace capital machinery.
5. Repayment method:Repayment of loan is made instalment basis that may me in balloon payment method or capital recovery method.6. Security provision:Though loan is used to purchase assets, security is required to get this type of loan. Especially small or middle business must require security to collect this loan. Generally buildings, machineries, plant etc. are used as security. Now-a- days share, debenture, etc. also used as security.
Intermediate Sources of Capital
7. Cost of financing:Cost of this financing is relatively more than short-term finance and less than long-term finance.
8. Flexibility:The amount of loan or repayment of loan is flexible. Suppose you have got five years period loan from a bank against a plant asset. Your assets life time is 20 or 25 years; here you can enhance your loan or repayment period.
9. Renewable:Intermediate-term financing agreement is renewable. Commercial bank normally offers renewable option to business at the end of loan period.
Intermediate Sources of Capital
Advantage of Intermediate Term Financing1. Flexibility: the borrower can get loan as his/her need.2. Low cost: cost is less than long-term financing.3. Convenience in repayment: the borrower can repay the loan as instalment or at a time.4. Renewable: if the borrower fails to repay instalment, the loan repayment period can be expand.5. Maintaining secrecy6. Goodwill for the borrower7. Rapid financing: collecting loan from capital market by selling share or debenture is time consuming. So business collect intermediate-term credit in a short time.8. Control9. Only source for small business10. Get ownership of asset without capital11. Tax advantage
Intermediate Sources of Capital
Disadvantage of Intermediate Term Financing1. It is comparatively high cost than short-term financing.2. Inconvenience of instalment payment if inflow of cash is decreasing.3. If borrower fails to repay instalment, the lender collect money by selling borrower’s collateral security.4. It is not easy to get loan for financially weak, small and new business. Because banks, financial institutions give more afford to borrower’s financially solvency when considering loan.5. Sometimes lenders impose some restrictions over the borrower which limits the borrower’s power.6. The borrower is required to keep a portion of loan as compensating balance.
Sources of INTERMEDIATE – TERM FINANCING
Private Financial Institution The Government
Private Commercial Banks
Insurance Companies
Finance Companies
Factors
Pre – Need Companies
Conduit Private Banks Conduit Private Banks
Private Commercial Banks
Private Thrift Banks
Private Development Banks
Rural Banks
Private Savings and Mortgage Banks
Private Savings and Loans Associations
LDP
DBP
Private Financial Institution (Private commercial Bank)
Private Commercial Banks
An establishment that focuses on dealing with financial transactions, such as investments, loans and deposits.
-
Term Loan Defined Is a bank advance for a specific period repaid, with interest, usually by regular periodic payments.-
3 Types of term loan
Straight term loan – granted to finance fixed assets.
Revolving Credit – is a legally assured line of credit, normally extended for two or three year time period.Evergreen Credit – is a revolving credit a arrangement without a stated maturity.
Private Financial Institution (Private commercial Bank)
Term Loan Agreement Formal loan agreements are required in the granting of term loans.
-
Loan Agreement Features :
Repayment Schedules Interest rates Maximum commitments
Private Financial Institution (Private commercial Bank)
Common Provision of a Loan Agreement:
1. The borrower is required to maintain a certain amount of working capital or a given current ratio.
2. The borrower is required to furnish the book of the creditor with audited annual financial statements and directed quarterly or monthly statements.
3. The borrower is prohibited to dispose his business property, except inventories.
4. The borrower is prohibited from incurring additional long – term debts or additional lease obligation.
5. The borrower is not allowed to repurchase the company’s own stock.
Private Financial Institution (Private commercial Bank)
1. Equal Principal Payments 2. Equal Amortization 3. Balloon Payment 4. Deferred Payment of Principal with Grace Period.
Repayment of Term Loans:
Private Financial Institution (Private commercial Bank)
Equal Principal Paym
ents
Equal Amortization
Balloon Payment
Deferred Payment of
Principal with Grace Period
Original Principal: 100,000Lone Term: 10 Yrs.Annual Interest rate: 8%
Under this arrangement, the loan is repaid in equal amount of principal
-
Year Outstanding Principal at the
beginning of year(P)
Interest due at end of year(I)
(P*8%)
Repayment of principal at end of
year (RP)
Total Payment at end of year(TP)
(I+RP)
12345678910
PhP. 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000
PhP. 80,000 7,200 6,400 5,600 4,800 4,000 3,200 2,400 1,600 800
PhP. 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000 10,000
PhP. 18,000 17,200 16,400 15,600 14,800 14,000 13,200 12,200 16,600 10,800
Private Financial Institution (Private commercial Bank)
Equal Principal Payments
Equal Am
ortization
Balloon Payment
Deferred Payment of
Principal with Grace Period
Original Principal: 100,000Lone Term: 10 Yrs.Annual Interest rate: 8%
- Under this arrangement, the loan is repaid in equal installments.
Years Outstanding Principal at the
beginning of year(P)(P-RP)
Interest due at end of year(I)(P*8%)
Repayment of principal at end
of year (RP)
Total Payment at end of year(TP)
12345678910
PhP.100,000.00 93,097.00 85,641.76 77,590.10 68,894.30 59,502.84 49,360.06 38,405.86 26,575.32 13,798.34
PhP. 8,000.00 7,447.76 6,851.34 6,207.20 5,511.54 4,760.22 3,948.80 3,073.46 2,126.02 1,103.86
PhP. 6,903.00 7,455.24 8,051.66 8,695.80 9,391.46 10,142.78 10,954.20 11,830.54 12,776.98 13,798.34
PhP. 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903 14,903
Private Financial Institution (Private commercial Bank)
Equal Principal Payments
Equal Amortization
Balloon Paym
ent
Deferred Payment of
Principal with Grace Period
Original Principal: 100,000Lone Term: 10 Yrs.Annual Interest rate: 8%
- Loan is repaid in equal installments for a number of years, then, a large and final payment is made at maturity date.
Years Outstanding Principal at the
beginning of year(P)(P-RP)
Interest due at end of year(I)(P*8%)
Repayment of principal at end
of year (RP)
Total Payment at end of year(TP)
12345678910
PhP.100,000.00 94,000.00 87,520.00 80,521.60 72,693.32 64,800.38 55,984.41 46,463.16 36,180.21 25,074.62
PhP. 8,000.00 7,520.00 7,001.60 6,441.72 5,837.06 5,184.03 4,478.75 3,717.05 2,894.41 2,005.96
PhP. 6,000.00 6,480.00 6,998.40 7,558.28 8,162.94 8,815.97 9,521.25 10,282.95 11,105.59 25,074.62
PhP. 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 14,000 27,080.58
Private Financial Institution (Private commercial Bank)
Equal Principal Payments
Equal Amortization
Balloon Payment
Deferred Payment of
Principal with Grace
Period
Original Principal: 100,000Lone Term: 10 Yrs.Annual Interest rate: 8%
- The payment of principal under this program is deferred, although payments on interest are made.
Years Outstanding Principal at the
beginning of year(P)(P-RP)
Interest due at end of year(I)(P*8%)
Repayment of principal at end
of year (RP)
Total Payment at end of year(TP)
12345678910
PhP.100,000.00 100,000.00 100,000.00 100,000.00 88,792.80 76,689.02 63,616.94 49,499.09 34,251.81 17,784.75
PhP. 8,000.00 8,000.00 8,000.00 8,000.00 7,103.42 6,135.12 5,089.35 3,959.92 2,740.14 1,422.78
PhP. - - - 11,207.20 12,103.78 13,072.08 14,119.85 15,247.28 16,467.06 17,784.75
PhP. 8,000.00 8,000.00 8,000.00 19,207.20 19,207.20 19,207.20 19,207.20 19,207.20 19,207.20 19,207.53
Private Financial Institution (Private commercial Bank)
Private Financial Institution (Insurance Company)
Term lending by Insurance Company
- Insurance companies are important sources of term loans. The premiums generated constitute advances to the insurance companies for periods varying from six months to five years.
Private Financial Institution (Finance Companies)
Term lending by Finance Companies
Finance companies has developed special instalment financing plans for firms acquiring machinery and equipment
-
Private Financial Institution (Finance Companies)
Fund which may be derived from such borrowings may be used for the following purpose:
1. As additional working capital;2. For the purchase of machinery;3. For the construction of additional plant and
equipment;4. For the retirement of maturing securities;5. For buying out partners or stockholders; and6. For the purchase of other companies
The Government
Government financial institutions have become regular sources of intermediate loans. Among them are the Land Bank of the Philippines, the Development Bank of the Philippines, the Social Security System, the Government Service Insurance System, and some other.
Corporate Finance Ross Westerfield Jaffe Sixth Edition
Intermediate Sources of Capital
http://waysoftraffic.blogspot.com/2011/08/9-important-features-of-intermediate.html
Medina, Roberto G. Business Finance, Second Edition. Sampaloc, Manila: Recto Avenue, 2007
http://slidegur.com/doc/1756905/powerpoint-presentations-chapter-12
http://www.slideshare.net/nufc11/sources-of-finance-12116188
Thank You!