short and long term finance

​Short term and long term finance

By: Mr.Donny.

Hook: Why do we need finance?

1. Setting up a new business

2. Need to finance our day-to-day

activities (cash)

3. Business Expansion

4. Research into new products

5. Special situations such as a fall in sales

Finance is required
for many activities

⚫ Setting up a business will require start-

up capital of cash injections from the
owner(s) to purchase essential capital
equipment and, possibly, premises.

​GOTO, transportation company, has incurred significant losses, amounting to Rp40.5 trillion. but still continue operating.

​1. PT XL Axiata Acquires PT Link Net. One of the companies that conducted an acquisition this year is PT XL Axiata, which acquired PT Link Net. 2. Indosat Ooredoo Merges with Hutchison Tri. 3.Tiket.com Merges with BliBli.
4. Gojek acquires tokopedia

Because of investors, acquisitions sometimes happen in business. Here are some examples:

Multiple Choice

Sufficient working capital is needed to prevent a business from becoming insolvent/ unable to pay debts owed..

• True

• False

• Not sure

​Yesterday we have learned this:

​Today we will learn deeper about:

Finance is required
for many activities

⚫ Business expansion needs finance to

increase the capital assets held by the
firm – and, often, expansion will involve
higher working capital needs.

Finance is required
for many activities

⚫ Special situations will often lead to a

need for greater finance. A decline in
sales, possibly as a result of economic
recession, could lead to cash needs to
keep the business stable; or a large
customer could fail to pay for goods, and
finance is quickly needed to pay for
essential expenses.

Finance is required
for many activities

⚫ Apart from purchasing fixed assets,

finance is often used to pay for research
and development into new products or to
invest in new marketing strategies, such
as opening up overseas markets.

Debt Factoring

• Is a finance service whereby a factor

(such as a bank) collects debts on
behalf of other businesses, in return
for a fee.

examples: 1. Aditama Finance · 2. SG Finance · 3. PT IFS Capital Indonesia · 4. PT Tifa Finance.

Key Terms

⚫ Start-up capital – capital needed by an

entrepreneur to set up a business

⚫ Working capital – the capital needed to

pay for raw materials, day-to-day running
costs and credit offered to customers. In
accounting terms:
• working capital = current assets – current

liabilities

Sources of Finance

Multiple Choice

A fixed assets of business firm should be financed through :

• Long term liability

• Short term Liability

• A Mix of long term and short term liability

• A Mix of long term and short term liability None of the above

Personal Funds

⚫ Main source of finance for sole traders

and partnerships
• Sole traders – a business in which one person

provides the permanent finance and in return
has full control of the business and is able to
keep all the profits

• Partnerships – a business formed by 2 or

more people to carry on a business together,
with shared capital investment and usually
shared responsibilities

Profits retained in the business

⚫ If a company is trading profitably, some

of these profits will be taken in tax by the
gov’t (corporate tax) and some is nearly
always paid out to the owners or
shareholders (dividends). If any of the
profit remains, it is kept in the business
and this retained profit becomes a
source of finance for future activities.

Sale of Assets

⚫ Businesses could sell assets that are no

longer fully employed to raise cash.

⚫ Some businesses will sell assets that

they still intend to use, but which they do
not need to own. Assets might be sold to
a leasing specialist and leased back by
the company. This will raise capital but
there will be an additional fixed cost in
the leasing and rental payment.

External Sources of

Finance

Long-term Financing:

To purchase fixed assets that will be
used for many years, or to fund a take-
over.

Issue New Shares
(Share Capital)

Available to limited companies (PLC’s and

LTD’s).

⚫ Advantages:

• A permanent source of finance that does not

have to be repaid.

• No interest is charged.
• Large sums can be raised.

Issue New Shares

⚫ Disadvantages:

• Shareholders will expect dividends to be paid.
• Original owners may lose control of the company if

new shareholders are created (exception – a Rights
Issue allows existing shareholders in plc’s to maintain
their % shareholding).

• Can be expensive to organize (fees paid to advisors

etc).

• May take some time to arrange.
• Dividends paid after tax, so less money available to

shareholders.

Long-term Bank Loan
(Loan Capital)

A loan for 10 years or more.
Example: Mortgages and Business Dev. Loans

⚫ Advantages:

• Quick to arrange (money immediately

available).

• Flexibility over repayment term (eg 10 years-

25 years).

• Discount rates often available if large sums

borrowed.

• Interest is paid before the profits are taxed.

Long-term Bank Loan
(Loan Capital)

⚫ Disadvantages:

• Loans must be repaid.
• Interest is charged and must be paid, even if

the firm makes a loss.

• Interest rates may be variable which adds

risk.

• Collateral or security is often required.

Bonds and Debentures (long-term loan
certificates)

⚫ Debentures are a type of long-term loan

with the promise of fixed annual interest
payments to the debenture holders and
are repayable on maturity


examples: government bonds, multinational debentures.

Debentures (long-term loan
certificates)

⚫ Advantages:

• Debenture holders can re-sell the debenture

(increased liquidity is an attraction for
investors).

• Interest rate is fixed. This reduces risk for the

business.

• Enables very long-term financing (eg. 25

years).

Define the term initial public

offering (IPO).

• An initial public offering (IPO) occurs when a

company floats its shares on a stock exchange for
the very first time. For example, ABC floated its
shares in both Shanghai and Hong Kong. In doing
so, ABC became a public limited company.

Hire Purchase

The business pays monthly installments to a finance company.

When the final installment is paid the asset becomes the
business’. examples: adira, FIF, etc.

⚫ Advantages

• Enables businesses to buy assets when they have

little cash available, or when they do not want to
commit large amounts of cash to acquire assets.

• No collateral required (the asset being purchased is

the collateral).

• Useful for businesses that have limited finance

options.

Leasing
Businesses sign a contract with a leasing firm. They

effectively rent the assets they need from that firm
for an agreed period of time.

⚫ Advantages:

• Firms can make use of assets without the need for large

sums of money.

• Frees money to be used elsewhere in the business (helps

cash flows).
• Gives the firm flexibility. It can lease assets only when it

needs to use them (reduces costs).
• The care and maintenance of the asset is the responsibility

of the leasing company.
• Assets are kept up to date (ideal for computers and other

equipment that become obsolete quickly).

External Sources of

Finance

Short-term Financing:

Provides the working capital needed for
the day-to-day expenses of the
business.
Covers the period from a few days to
12 months.

Bank Overdraft

⚫ Disadvantages:

• Interest rates are generally higher than for a

loan.

• A fee is often charged for having the facility.
• Not generally available for a long period of time.
• The bank can ask for repayment at any time

which could cause the business to be made
bankrupt.

• There will be an upper limit to the facility. The

firm cannot be overdrawn more than this.

Trade Credit

When a business delays paying its

suppliers for an agreed period of time
(usually 30 or 60 days).

⚫ Advantage:

• Is like the business receiving an interest-free

loan for a month or two.

• Allows the business to sell goods before

paying for them.

Debt Factoring

⚫ Disadvantage:

• The firm only receives a % of the money

owed to it (around 80-85%).

External Sources of

Finance

Grants & Subsidies

Grants

Money usually given by the government to

assist firms with important expenditures.
Advantages:
• Enables businesses to fund important projects

like training, or the purchase of new
equipment / technology.

• Encourages businesses to adopt new

methods / technologies eg. alternative energy
generators.

Venture Capital

vs.

Business Angels

Sources of Finance

Venture Capital (VC)

⚫ Is a high-risk capital invested by venture

capital firms, usually at the start of a
business idea. The finance is usually in
the form of loans and/or shares in the
business venture.

⚫ Venture capitalists seek to invest in

small to medium-sized businesses that
have high growth potential.

Business Angels (BA)

⚫ Are wealthy entrepreneurs who risk their

own money by investing in small to
medium-sized businesses that have high
growth potential.

⚫ They take proactive role in the setting up

or running of the business venture –
owner loses some control to the BA

⚫ By contrast, venture capital is typically a

pool of professionally managed funds.

Multiple Choice

Is investment spending on fixed assets such as the purchase of land
and buildings.

• working capital

• capital expenditure

• Revenue expenditure

Capital expenditure

• Is investment spending on fixed

assets such as the purchase of land
and buildings.

External sources of

finance

• Means getting funds from outside

the organization, e.g. through debt
(overdrafts, loans and debentures),
share capital, or the government.

Business angels

• Are wealthy entrepreneurs who risk

their own money by investing in small
to medium-sized businesses that
have high growth potential.

Grants

• Are government financial gifts to

support business activities. They are
not expected to be repaid by the
recipient.

Initial Public Offering

(IPO)

• Refers to a business converting its

legal status to a public limited
company by floating (selling) its
shares on a stock exchange for the
first time.

Internal sources of

finance

• Means getting funds from within the

organization, e.g. through personal
funds, retained profits and the sale
of assets.

Leasing

• Is a form of hiring whereby a

contract is agreed between the
lessor and the lessee.

Loan capital

• Refers to medium to long-term

sources of interest bearing finance
obtained from commercial lenders.
Examples include mortgages, business
development loans and debentures.

Overdrafts

• Allow a business to spend in excess

of the amount of its bank account, up
to a predetermined limit. They are
the most flexible form of borrowing
in the short term.

Retained profit

• Is the value of surplus that the

business keeps to use within the
business after paying corporate
taxes on its profits to the
government and dividends to its
shareholders.

Revenue Expenditure

• Refers to spending on the day-to-day

running of a business, such as rent,
wages and utility bills.

​What have you learned today:

​"Do not seek friends who make you feel comfortable, but look for friends who push you to keep growing. Great people are not produced through ease, pleasure, or comfort; they are shaped through difficulties, challenges, and tears."