Financial Guide for SMEs - SME Corporation Malaysia

Types of Security RequiredFinancial Guide for SMEsDEBT EQUITY INTERNAL FINANCEand the lender can thencall on other assets ofthe individual to meetbusiness debts, subjectto the terms of theguarantee.How Each Funding Party Receives Income on Their FundsDEBT EQUITY INTERNAL FINANCEA lender achieves areturn on their investedfunds through thepayment of interest.Interest terms can varysignificantly, based onthe terms and conditionsof the finance. In order tocompare the various debtproducts, you should beaware of:• The basis for calculationof the interest;• Exposure to interestrate changes;• The timing of interestpayments; and• Fees and charges.Debt finance often has arequirement to meet bothinterest and principalrepayments during theterm of the loan.Therefore, debt financehas an important cashflow impact on a growingbusiness.An equity investorreceives the return onfunds invested in twoways:• Profits from thebusiness (and whichcan be left in thebusiness to fundfuture growth); and• Increased value ofthe business (as thebusiness increasesin overall value, theequity investor’sinterest in thebusiness will increaseproportionately;however, this increasein value will not berealised until thebusiness or owner’sinterest is sold).It can be seen from theabove that the focusof the equity investoris on long-term growthof the business. As aresult, equity funds donot generally place cashflow pressures on thebusiness.Using internal sourcesof finance will notincur any fees orinterest payments.86chapter 7-13 p79-181 Eng.indd 868/15/11 5:02:54 PM