Business finance- Intermediate sources of Capital

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.






• 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.






• 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 term financing or Intermediate Source of Capital. Refers to borrowings with repayment schedule of more than one year but less than ten years.



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.


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.


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.


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


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 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)


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.


Term Loan Agreement Formal loan agreements are required in the granting of term loans.

-

Loan Agreement Features :

Repayment Schedules Interest rates Maximum commitments


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.


1. Equal Principal Payments 2. Equal Amortization 3. Balloon Payment 4. Deferred Payment of Principal with Grace Period.

Repayment of Term Loans:


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


Equal Principal Payments

Equal Am

ortization

Balloon Payment

Deferred Payment of



- 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)


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



Equal Amortization

Balloon Paym

ent

Deferred Payment of



- Loan is repaid in equal installments for a number of years, then, a large and final payment is made at maturity date.





of year (RP)


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



Equal Amortization

Balloon Payment

Deferred Payment of

Principal with Grace

Period


- The payment of principal under this program is deferred, although payments on interest are made.





of year (RP)


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 (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


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

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