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Sources of Finances


Some of the sources of finance that are available as an alternative to overdraft lending are shown as following:

1.      Bank loans

Fixed term loan allows borrow a fixed amount for a fixed period of time and interest is charged at either a fixed rate or a variable rate (HSBC, 2002).  The financing is secure for the life of the loan but it is often lack of flexibility, for example the bank requires some form of security such as legally binding covenants before agreeing to a loan or real estate as security.

2.      Subsidized and guaranteed loans, and grants

These include government loans and loans subsidized by government or local agencies.  For example, the HKSAR Government offers four funding schemes for small and medium enterprises (SME): SME Business Installations and Equipment Loan Guarantee Scheme (BIG), SME Export Marketing Fund (EMF), SME Training Fund (STF) and SME Development Fund (SDF) since 2001 (Trade and Industry Department, 2002).  It is intended to guarantee loans from banks and other financial institutions for sound business projects that cannot get conventional financing owing to lack of suitable security.  Grants are special assistance from government or local charities (HSBC, 2002).

3.      Equity (capital) funding and business angels

Equity funding allows an outside investor to inject money into the business in return for an equity stake (HSBC, 2002).  Business angels are wealthy, entrepreneurial individuals who provide capital in return for a proportion of the company・s shares (Business Hotline, 2001).  Both incur the greatest risk of all capital on the part of the investors, and hence they usually demand high returns to commensurate with that risk.  The sources include venture capital, acquisition financing, employee buyouts, and recapitalizations, etc (Capital.Com, 2001).

4.      Factoring and invoice discounting

Factoring allows the company to raise finance based on the value of outstanding invoices, or the value of the invoice at a discounted rate (Business Hotline, 2001; HSBC, 2002).  However, there are often constraints, for example the factoring company usually takes over the maintenance of the sales ledger of the company.

5.      Financing equipment

Hiring and leasing equipment is one way of making capital go further such as hire purchase, finance lease, operating lease, contract purchase, and sale and leaseback (Business Hotline, 2001; HSBC, 2002).  Finance equipment reduces the financial burden of capital expenditures and allows a company to pay for the equipment as that equipment helps produce income.


References

Business Hotline Publications Ltd (2001), Director・s Briefing, [Online, accessed 24 February 2003]
URL:http://www.business hotlinepublications.co.uk

Capital.Com (2001), .Types of Financing・, [Online, accessed 24 February 2003]
URL:http://www.capital.com/resources/resource_directory.cfm?DropDownGrouopID=33

HSBC Bank Plc (2002), .Starting a Business: Sources of Finance・, [Online, accessed 23 July 2002]
URL:http://www.ukbusiness.hsbc.com/sab/sab00018.jsp

Trade and Industry Department (2002), .A Report on the Review of the SME Funding Scheme・, 17 December, [Online, accessed 24 February 2003]
URL: http://www.tid.gov.hk/english/aboutus/publications/smes/review_2.html


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