Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsFinancial Guide for SMEsSection III : Financing Your BusinessFinancing your business is an important part of good financialmanagement practice. Not only having access to finance, but alsobeing able to choose the most appropriate method of finance for yourbusiness will result in continued growth and profitabilityChapter Seven – Debt, Equity orInternal Funds?A key requirement to ensure that you choose the right funding is tomake certain that you fully understand the differences between debtand equity, and to consider the implications of each on your businessTopic Hint TipComparing DebtFinance, EquityInvestment andInternal FundsTo fully understand the implications ofchoosing debt, equity or internal fundsto fund your business, ask yourselfwhat would happen if something goeswrong. The answer will help you tomake the right choiceGenerally, a business would aim to maximise theuse of debt finance to fund its operations, as longas the business can service the level of debt andhas enough security to support the funding. Thebusiness owner would retain the benefits ofownership in respect of growth and profitability oftheir businessDeciding BetweenDebt and EquityIn deciding whether or not to seekan equity party, you need to considerboth the financial and non-financialoutcomesYou may find that your ability to raise debt improveswith equity investmentUnderstanding theDebt Financing OptionsLong-term versusShort-termIt is important to review alternative Ensure that the type of financing undertakenfinance products from different matches the reason for seeking finance. A generallenders and ensure that you are rule of thumb is to match the term of the loan withcomparing apples with apples the length of the life of the asset you are funding174174chapter 7-13 p79-181 Eng.indd 1748/15/11 5:03:11 PM