Let’s start with the basic definition of financing. According to the dictionary, financing is defined as to raise funds or capital for a purpose, example like buying a house, buying a business office or car, starting a business, purchasing of machinery and equipment for your business or simple raising more working capital for the day to day running of your company.
Today we take a look at some the ways companies and businesses raise capital. My guess is that the very first thought that comes to your mind is going to a bank. Bingo, you got it absolutely right, but besides going to the banks and financial institutions, our topic will also cover a little about the other various capital raising channels like equity financing, debt financing, venture capital funds and government grants etc.
A Bank is a financial institution that gathers surplus resources (monies) and redistributes the surplus resources (the monies) to people/businesses/companies that need it and earn its business income from the cost of funds and the lending yield spread.
Like any other businesses, the raw material of a bank is monies. It is a supplier of the raw material monies, repackages it into various financing packages, terms and conditions and sells it to businesses and consumers to buy homes, properties, cars, finance trades etc. A bank acquires funds from various sources like the interbank bank, overseas swap market, depositor's funds etc...
Some examples of business loans are business term loans, business working capital loans, business micro loans, trade finance LC/TR, Receivables Finance, Asset-based financing, commercial and industrial property mortgages and financing for business machineries and equipments. Assets backed by collateral typically attract a lower financing cost as the risk is hedge off against the asset value of the collateral.
The issuance of bonds is a kind of debt financing. You invest a sum of money, in exchange for a piece of bond certificate that promises to pay you a coupon rate every year, say example 6% per annum etc. Bonds can be issued by companies and governments. A bond issued by the government is term as treasury bills.
Equity financing is the act of selling stocks to individuals and companies for in return for ownership and shareholding of the company.
A recent example of equity financing is the Facebook IPO. Just last month in May 2012, Facebook launch its IPO, the largest Internet IPO in the US and the third largest IPO ever with a target valuation of over a 100 billion and is expected to raise capital of more than $16 billion US dollars.
Financing provided by an affluent individual that provides capital for a business start-up in exchange for a shareholding ownership of the company. Angels typically provide capital funding with their own monies. The risk is typically quite high but when the jackpot is hit, the returns are exponential. Compare this with venture capital.
Financing provided to new business start-up, quite similar to an angel funding but a venture capital is pooled together by a group of investors & businesses and the monies are professionally managed and invested for a return.
Government grants and Financial Assistance Schemes by the government
Grants and financial assistance schemes provided by the government to support growth of businesses.
- Micro Loan Program
The Micro Loan program provides funding for local Small and Medium Enterprise (SME) companies registered or incorporated in Singapore with 10 or less employees, minimum 30% local shareholding and group annual sales of not more than $100 million or company's group employment size of not more than 200
The use of funds can be for daily working capital, operations, automating and upgrading of factory and equipments.
- Local Enterprise Finance Scheme (LEFS)
The LEFS scheme provides loans of up to $15 million for all locally owned Small and Medium Enterprise (SME) businesses with at least 30% local shareholding and annual sales of not more than $100 million or group employment size of not more than 200.
The use of the funds can be for automating of factory and equipments, purchasing of factory and business premises (only JTC and HDB properties), financing of construction equipments and heavy vehicles.
- Loan Insurance scheme (LIS)
The Loan Insurance Scheme insures your loans against default risks. The insurance premiums is co-shared between the government and your business enterprise.
The premium rate will be determined by the issuer based on the risk profile of the borrower. The Singapore Government co-shares 50% of the premium payable.
The Loan Insurance Scheme supports both local trade and overseas trade facilities and is open to Small Medium Enterprise (SMEs) with at least 30% local shareholding, company's group annual sales of not more than $100 million or group employment size not more than 200 workers*
- Internationalisation Finance Scheme (IFS)
Administered by IE Singapore, The IFS scheme is designed to help Singapore based companies expand their operations overseas. The IFS Loan can be used to purchase factories, building, machineries and equipments or finance overseas projects or confirmed sales orders. The maximum loan exposure shall not exceed $15 million Singapore dollars.