COMPONENTES DE OBRA

Increasing demand for finance has caused the evolution of an efficient capital market in which different types of finance are available from many sources.

Business are basically financed from two sources: use of owner's funds – such funds are normally permanently invested in the business, only to be repaid if business operations case; use of other people's funds – to be repaid as agreed, unless they are government grants.

Own funds are gleaned from:

- the past and continuing savings of the original proprietor; - profits earned in the business and retained for reinvestment;

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- the savings of people who become part-owners of the business, through partnership or shareholdings;

- making more efficient use of the capital already invested in the business. Other people's funds come from:

- loan providers; - suppliers' credit;

- instalment credit, hire purchase and leasing arrangements; - grants and allowances from central and local government. Short-term Borrowing (up to three years)

Bank loans – are usually for fixed amounts, for specified periods, at fixed rates of interest, although interest governed by changing market rates can be negotiated. Banks normally insist that repayment is secured by the pledging of particular assets – called a fixed charge.

Bank overdrafts – are easily arranged and more flexible than loans because, whilst a top limit of borrowing is specified, the amount of finance required at any particular time may vary, together with interest rates charged, and therefore the average cost of borrowing ought to be lower.

Factoring and invoice discounting – usually involve the selling of debts to a finance house, which advances about 80% of the debts sold. Capital is thus released to be used on other projects. Factoring also includes a sales ledger management service for customers, with or without the advance of finance. The interest rate charged is above the bank's lending rate and if sales ledger management is included, there is an additional charge for that.

Bills of exchange – are equivalent to postdated cheques. A buyer of goods accepts an undertaking to pay the bill in, say, three months time by signing (accepting) it. The supplier is then able to obtain immediate payment by discounting (selling) the bill to a bank and therefore got early access to much-needed finance. The discount taken by the bank recompenses them for having to wait for payment from the buyer.

Medium-term Borrowing (from four to ten years)

Term loans – are principally made by banks to growing companies. They normally cover projects or assets with lives matching those of the loans. Interest may be at a fixed or a variable rate and repayment of the capital can be delayed in the earlier years of the loan if desired. The banks normally insist that term loans be secured on tangible assets, but unsecured loans may be negotiated at higher interest rates.

Long-term Borrowing (over ten years)

Term loans – similar to medium-term loans, but for longer periods and at higher interest rates. Usually secured on fixed assets.

Mortgage loans – are normally made by insurance companies and pension funds for periods of more than twenty years at fixed rates of interest. They are mainly secured by deposit of the title deeds of the property mortgaged. The main recipients are large companies to finance long-term assets, but smaller companies are increasingly being accommodated by mortgage loans from other institutions.

Considerations on the financial planning 171 Debentures and loan stocks – are transferable securities, normally secured on specific assets or by a “floating charge” on all the assets of the business giving the holder priority in repayment of the debt over the claims of other creditors. The interest rate is fixed and the securities are repayable on or between certain dates. Unsecured debentures may also be issued, but at higher interest rates.

Convertible loan stock – has the added feature of giving the holders the option to convert their loan securities into shares on or between specified dates at predetermined prices.

Sale and leaseback – is a method of realising 100% of the value of property by selling it mainly to insurance companies and pension funds, but retaining use of it by leasing it back for a long period.

Trade Credit on Goods and Services

Trade credit is a universal means of financing, especially important to smaller companies which lack access to many sources. Taking extended credit without agreement of the supplier is often resorted to these days, but might result in loss of the suppliers' goodwill. Where cash discount is offered for prompt payment, delaying payment may secure more finance, but can be very expensive in loss of discounts. Some suppliers will allow arrangements for customers to pay them by instalments.

Hire Purchase and Leasing

Hire purchase is a method of financing now much used by businesses. The agreement prescribes a deposit payment, the repayment being by instalments over a period of usually less than five years, and a final payment whereupon the goods become the possession of the hirer. Tax advantages include capital cost allowance to be set off against profit and interest charged can be debited against profit of the hirer.

Leasing is similar to hire purchase, save that the lessee never owns the asset. The lease ensures continuous use of the asset. Tax capital allowances are passed back to the lessee in lower interest charges and the lease payments are wholly chargeable as an expense against the profit of the lessee. Leasing is often referred to as “off-balance- sheet” financing, because neither the asset nor the lease liability appear on the lessee's balance sheet, although this only applies to operating leases.