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“ never put your money into business unless you have to.”
Capital Requirements
Capital comes in monetary terms and in three forms as follows;
FIXED CAPITAL
WORKING CAPITAL
GROWTH CAPITAL
FIXED CAPITAL
Fixed capital refers to;
- Money needed to purchased fixed assets or capital goods.
- acquisition of machinery, buildings, office equipment and all
those fixed assets or items needed in the provisions of services to the
customer.
WORKING CAPITAL
- is needed to fund day-to-day operations.
- refers to money(hard cash) to support its normal short term
operations.
- Generally used for inventory, payroll, utilities and stock as well to keep
business an on going concern.
GROWTH CAPITAL
- is not related to daily or seasonal requirements for funds of the
business.
- Needed when an existing business needed to expand, diversify, or
change it’s direction.
- This fund is mainly used for company’s growth.
Sources of Capital
• In broad terms funds needed for the business can be generated either
externally or internally.
Internal fund sources generally refers to the funds which are
owned by the entrepreneurs itself, whereas external capital essentially
refers to those beyond the entrepreneur and the company.
BONDS
A bond, also known as a fixed income security, is a debt instrument created
for the purpose of raising capital. They are essentially loan agreements
between the bond issuer and an investor, in which the bond issuer is obligated
to pay a specified amount of money at specified future dates.
Long Term Commercial Paper( LCP)
are commercial documents issued by large companies with
credible track. Like bonds LCP carries a fixed return promised by the
issuer.
Short Term -Creditors
Short term creditors take the form of financiers on short term
basis lasting to one year or less
- Do not bulk documents to be approved
- No need for the business plan/feasibility study to be presented to be
approved
- can serve as stand-by credit facility to entrepreneur
- Can borrow money or goods by simple using phone
- Brief visit to offices to sign papers
Follow are the providers of short term credits
Commercial Bank
commercial banks are duly bound to provide both short term
and long term credits.
Merchandise suppliers.
The company’s inventory or stock can be procured either
through cash or credit terms. Entrepreneurs who procured their
inventory on credit terms are not only daring but also smart
entrepreneurs. Hard cash intended to buy/procure inventory van be
used for other purposes if inventory is procured on credit basis.
CREDIT CARD COMPANIES
Credit card is the most convenient yet the most expensive loan
terms you can find.
CAPITAL EQUIPMENT SUPPLIERS
LEASING COMPANIES
RECIEVABLE FACTORS
DEFERRAL FACTORS
Seat work
1. Differentiate formal to informal sources
2. Why collateral is needed/ required in bank financing
3. List 5 examples of formal and informal sources of funds