Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsThe assets of the business can also be funded froman investor who wishes to put permanent equity capitalinto the business. If the business is a company, theneither new shares are issued by the company or theinvestor may purchase some of the shares from theoriginal owner. You should seek advice from youraccountant regarding the capital gains, tax and cashfl ow implications of each of these choices in relation toyour specifi c circumstances.Utilising internal funds generated from the business is,in most circumstances, one of the more favourablealternatives. Most SMEs do not adequately assess thepotential ability to generate more cash fl ow throughHINTTo fully understandthe implicationsof choosing debt,equity or internalfunds to fund yourbusiness, askyourself what wouldhappen if somethinggoes wrong. Theanswer will help youto make the rightchoicegood management of working capital. Chapter 5 provides details on how this canbe achieved. Where additional cash can be sourced through good managementof working capital, this source of fi nancing can provide many advantages oversourcing of funding through debt or equity.The table on the next page outlines the key areas to consider when comparingdebt and equity. It shows the differences between those who have an interest inthe ownership of the business (equity party), such as yourself or a shareholder,and that of a party who has a debt fi nance relationship with your business(a bank).The comparison looks at:• Defi nitions and examples of each;• Level of risk for each financier / investor;• Types of security required;• How each funding party receives income on their funds;• Repayment of debt fi nance / investment capital;• Impact of financial structure on the financial statements of the business; and• Advantages and disadvantages of the alternatives.82chapter 7-13 p79-181 Eng.indd 828/15/11 5:02:53 PM