CHAPTER 1

INTRODUCTION

1.1 Introduction to Finance

The term of the finance is that describes two related activities that means the
study how money is managed and the actual process of acquiring needed funds.
Besides, the term finance essentially refers to the allocation of resources. It including
the oversight, creation and study of money, banking, credit, investments, assets, and
liabilities that make up financial systems. Many of the basic concepts in finance come
from microeconomics and macroeconomics theories. One of the most fundamental
theories is the time value of money. Means that a ringgit today is worth more than a
ringgit in a future. Money available at the present time is worth more than the identical
sum in the future due to its potential earning capacity. This core principal of finance
holds that, provided money can earns interest, any amount of money is worth more the
sooner it is received. In the other side, financing is the act of providing funds for
business activities, making purchase or investing. Financial institutions and banks are in
the business of financing as they provide capital to business, consumers and investors to
help them achieve their goals. The use of financing is important in any economic
system, as it allows companies to purchase products out of their immediate reach. There
are two main types of financing for companies which means debt and equity. Debt must
be paid back, but it is often cheaper than raising capital due to tax considerations.
Equity does not need to be paid back, but it relinquishes ownership to the shareholder.
Both debt and equity have their advantages and disadvantages. Most companies use a
combination of both to finance operations.

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1.2 Introduction to Sources of Finance

Sources of finance for business are equity, debt, debentures, retained earnings,
term loans, working capital loans, letter of credit etc. These sources of funds are used in
different situations. They are classified based on time period, ownership and control,
and their source of generation. It is ideal to evaluate each source of capital before opting
it.

Sources of capital are the most explorable area especially for the entrepreneurs
who are about to start a new business. It is perhaps the toughest part of all the efforts.
There are various capital sources, we can classify on the basis of different parameters.

Having known that there are many alternatives to finance or capital, a company
can choose from. Choosing the right source and the right mix of finance is a key
challenge for every finance manager. The process of selecting the right source of
finance involves in-depth analysis of each and every source of fund. For analysing and
comparing the sources, it needs the understanding of all the characteristics on the basis
of which sources of finance are classified.

On the basis of a time period, sources are classified as long term, medium term
and short term. Ownership and control classify control sources of finance into owned
capital and borrowed capital. Internal sources and external sources are the two sources
of generation of capital. All the sources of capital have different characteristics to suit
different types of requirements. Let’s understand medium term of financial sources a
little depth.

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1.3 Objective

The objectives of doing this report are to learn and understand theory of medium
sources of finance. Some objectives of doing this report are:

1.3.1 To discuss the different types of medium sources of finance.

1.3.2 To study the advantages and disadvantages of the different types of
medium sources of finance.
1.3.3 To understand the procedure to apply different types of medium sources of
finance.

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1.4 Methodology of Study

The objective of this methodology is to provide a detailed explanation of the

specific research method and tools used in the study of making the report. Methods that
have been used in order to complete this report are stated below

1.4.1 Book

 Information is obtained from the books that related to financing.

By reading some books, the general information regarding medium
term of source finance is obtain and some term and information has
been used to include in the report.

1.4.2 Internet
 Information is also collected from the internet by searching for the
articles and the meaning of any terms. A manual downloaded from
the internet then a part of that, videos that related to the topic is
watched from the Youtube to understand more about different kind
of finance sources.

1.4.3 Interview
 Interview have been done generally with Economics’ lecturer to
understand generally what the types of medium term in financial
sources is. Lecturer explained and the information are the guide
and have been take note and the information also included.
Interview also had been done with commercial banks by meeting
financial advisor that explain more details about financial sources.

1.4.4 Collecting data

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  The data is collected from internet and during interview where all
collected documents will be attached in the appendix.
CHAPTER 2

MEDIUM TERM SOURCE OF FINANCE

2.1 Definition

Medium Term Finance are sources of finance available for the mid-term of
between 3-5 years typically used to finance an expansion of a business or to purchase
large fixed assets. It is usually the larger amounts of borrowing or the use of the funds
that differentiates medium sources of finance from short term, although a number if the
short-term options are available for the mid-term.

Medium term is an asset holding period of investment horizon that is

intermediate in nature. The exact period of time that is considered medium term
depends on the investor’s personal preferences, as well as on the asset class under
consideration. In the fixed-income market, bonds that have a maturity period of five
years are considered to be medium-term bonds.

A day trader who seldom holds open positions overnight may consider a stock
that is held for a couple of weeks as a “medium term” position, whereas a long-term
investor may define medium term as a holding period of one to three years. Similarly,
homeowners may regard anything less than 10 years as a medium-term horizon when it
comes to real estate.

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2.2 Types of Medium Term Sources of Finance

2.2.1 Hire purchase

Hire Purchase is a kind of instalment purchase where the businessman (hirer)

agrees to pay the cost of the equipment in different instalments over a period of time.
This instalment covers the principal amount and the interest cost towards the purchase
of an asset for the period the asset is utilized. The hirer gets the possession of the asset
as soon as the hire purchase agreement is signed. He becomes the owner of the
equipment after the last payment is made. The hirer has the right to terminate the
agreement anytime before taking the title or the ownership of the asset.

2.2.2 Leasing

A lease is a contract outlining the terms under which one party agrees to rent
property owned by another party. It guarantees the lessee, also known as the tenant, use
of an asset and guarantees the lessor, the property owner or landlord, regular payments
from the lessee for a specified number of months or years. Both the lessee and the lessor
face consequences if they fail to uphold the terms of the contract.

The fundamental characteristic of a lease is that ownership never passes to the

business customer. Instead, the leasing company claims the capital allowances and
passes some of the benefit on to the business customer, by way of reduced rental
charges.

The business customer can generally deduct the full cost of lease rentals from
taxable income, as a trading expense. As with hire purchase, the business customer will
normally be responsible for maintenance of the equipment. There are a variety of types
of leasing:

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 a) Finance Leasing

The finance lease or 'full pay out lease' is closest to the hire purchase alternative.
The leasing company recovers the full cost of the equipment, plus charges, over the
period of the lease.

Although the business customer does not own the equipment, they have most of the
'risks and rewards' associated with ownership. They are responsible for maintaining and
insuring the asset and must show the leased asset on their balance sheet as a capital
item.

When the lease period ends, the leasing company will usually agree to a secondary
lease period at significantly reduced payments. Alternatively, if the business wishes to
stop using the equipment, it may be sold second-hand to an unrelated third party. The
business arranges the sale on behalf of the leasing company and obtains the bulk of the
sale proceeds.

b) Operating Leasing

If a business needs a piece of equipment for a shorter time, then operating leasing
may be the answer. The leasing company will lease the equipment, expecting to sell it
second-hand at the end of the lease, or to lease it again to someone else. It will,
therefore, not need to recover the full cost of the equipment through the lease rentals.

This type of leasing is common for equipment where there is a well-established

second-hand market (e.g. cars and construction equipment). The lease period will
usually be for two to three years, although it may be much longer, but is always less
than the working life of the machine.

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Assets financed under operating leases are not shown as assets on the balance sheet.
Instead, the entire operating lease cost is treated as a cost in the profit and loss account.

2.2.3 Loans

Term loan is a medium-term source financed primarily by government, banks

and financial institutions. Such a type of loan is generally used for financing of
expansion, diversification and modernization of projects—so this type of financing is
also known as project financing. Term loans are repayable in periodic instalments.

Term loan is a part of debt financing obtained from banks and financial institutions.

a) Security:

 Term loans are secured loans. Assets which are financed through term loans
serve as primary security and the other assets of the company serve as
collateral security.

b) Obligation:

 Interest payment and repayment of principal on term loans is obligatory on

the part of the borrower. Whether the firm is earning a profit or not, term
loans are generally repayable over a period of 5 to 10 years in instalments.

c) Interest:

 Term loans carry a fixed rate of interest but this rate is negotiated between the
borrowers and lenders at the time of dispersing of loan.

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d) Maturity:

 As it is a source of medium-term financing, its maturity period lies between 5

to 10 years and repayment is made in instalments.

e) Restrictive Covenants:

 Besides asset security, the lender of the term loans imposes other restrictive
covenants to themselves. Lenders ask the borrowers to maintain a minimum
asset base, not to raise additional loans or to repay existing loans, etc.

f) Convertibility:

 Term loans may be converted into equity at the option and according to the
terms and conditions laid down by the financial institutions.

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2.3 Procedure and Process of Application

2.3.1 Hire Purchase

a) In any hire purchase agreement, there is always the dealer, generally the seller,
by whom or on whose behalf negotiations leading to the making of a hire-
purchase agreement with the finance company were carried out.

b) Where the negotiation is successful, the prospective hirer will submit his or her
financial statements and supporting documents to the finance company for the
approval of a hire purchase facility or loan.

c) The finance company may require the prospective hirer to furnish a guarantor to
guarantee the performance of the prospective hirer under the hire purchase
agreement.

d) A finance company will not finance a loan for more than 90% of the "cash price"
of the goods.

e) Thus, a hirer must pay a deposit of at least 10% of the "cash price" of the goods.

f) Nevertheless, the hirer can agree to pay more than 10% and the balance to be
paid in instalments under a hire purchase facility.

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 g) Once the hire purchase facility is approved, the finance company will send a
letter of undertaking to the dealer to inform them of the approved hire purchase
facility.

h) All parties will then be required to sign and enter into a hire purchase agreement.

i) The hire purchase agreement must be duly completed before being signed by the
parties involved.

j) Within 14 days after the making of the hire purchase agreement, the finance
company must serve on the hirer and the guarantors a copy of the agreement
each, failing which would render the hire purchase agreement unenforceable by
the finance company.

The document required to be served on hirer or guarantors may be served by delivery it

to him personally or by posting it by registered post addressed to the last known place
of abode or business. Always keep all documents pertaining to hire purchase agreement
in a proper place.

2.3.2 Leasing

a) To pay one (1) month earnest deposit on letter of offer or acceptance. This is the
booking deposit, and the amount is usually equivalent to one month’s rent. After
the landlord signed the Letter of Intent and accept this deposit, he cannot rent the
said property to any other party. This deposit will become part of the security
deposit or advance rental after the legal Tenancy Agreement is signed. Within
seven days from date of acceptance both parties’ signs Tenancy Agreement.
Upon signing the tenant to pays up balance
 Security deposit: 2 months
 Utilities deposit: 1 months
 Government stamp duty and agreement fees
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 b) Upon payment, Tenant receives keys and take possession of property. When the
lease term ends, the security deposit will then be refunded without interest.
However, the landlord reserves the right to deduct from the deposit all costs,
damages and expenses arising from the tenant for breaching any of the
covenants stated in the Tenancy Agreement.
c) The Tenancy Agreement is sent to stamp office for stamping. A few days later
landlord & tenant receives the stamped copy of the agreement. The Tenancy
Agreement will have to be stamped by the Inland Revenue Authority of
Malaysia. Only after the Tenancy has been stamped then it becomes a valid legal
document. This is to protect the interest of both contracting parties. Rental rates
are inclusive of monthly service charges. Tenant pays for the utilities bills such
as water, sewerage, electricity & telephone. The fees that associated with renting
property are tenancy agreement, government’s stamp duties and agent’s fee.

2.3.3 Loans

a) Research and Compare Your Options

Getting a personal loan is similar to picking the right car to buy. Before settling on
one, you have to first conduct a thorough research. With personal loan, it is the same.
There are many things to consider including interest rates, fees & charges, your personal
requirements and so on.

For starters, use comparison websites like www.iMoney.my whenever possible as

websites like this compile information from various sources and present them in user-
friendly formats, saving you time and effort from research. Often, these websites also
include useful guides and tips on what you need to know before landing yourself a
personal loan.

b) Assess Your Personal Financial Situation

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 After gathering this information, compare the best options available to you with
your personal situation. Have a gauge of how much you need to pay on a monthly basis,
how long it will take to completely pay off the loan, and whether your personal finances
allow for such a loan. Settle on the one that most addresses your unique circumstances.

c) Locate the Appropriate Application Form

Often, banks make available their personal loan application forms on their websites.
Alternatively, you could personally visit a branch, or arrange for a bank representative
to meet you in person. Some banks may even allow phone or online applications, which
would further simplify the application process.

d) Read the Fine Print & Confirm the Numbers

It is wise to confirm your monthly repayment, loan term, and other miscellaneous
charges together with your banks prior to signing any loan agreement. Look carefully
through the terms of the loan as mistakes can happen. It is also advisable to spend a
couple of minutes scanning the fine print to ensure you’re not caught by surprise in
future.

e) Submit the Required Loan Documentations

Finally, get ready all the necessary documentations needed in order for your loan
to be approved. Below is a list of documents that are generally required by banks. If
you are a salaried employer:

 A completed application forms

 A copy of your identification card or permanent resident document

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  A copy of your current or previous month’s pay slip OR bank statement showing
salary credited into your account OR Form BE with tax receipt of payment OR
EA / EPF statement.

If you are self-employed:

 A completed application forms
 A copy of your identification card or permanent resident document
 A copy of your Latest Form BE with tax receipt of payment
 Copies of business registration Certificates

Note that these are just the general documentations needed. Depending on the banks and
other factors, more documents may be needed before the loan is approved. The approval
period of a personal loan can differ between banks, depending on the borrower’s credit
history and the type of loan applied.

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2.4 Breaking Down Medium Term Sources of Finance

2.4.1 Hire Purchase

Hire purchase agreements are similar to rent-to-own transactions which give the
lessee the option to buy at any time during the agreement, such as rent-to-own cars.
Like rent-to-own, hire purchase does benefit consumers with poor credit, by spreading
the cost of expensive items that they would otherwise not be able to afford, over an
extended time period.

Because ownership is not transferred until the end of the agreement, hire
purchase plans offers more protection to the vendor than other sales or leasing methods
for unsecured items, since the items can be repossessed more easily should the buyer be
unable to keep up with the repayments.

2.4.2 Leasing

Consequences for breaking leases range from mild to damaging, depending on

the circumstances under which they are broken. A tenant who breaks a lease without
prior negotiation with the landlord faces a civil lawsuit, a derogatory mark on his credit
report or both. As a result of breaking a lease, a tenant may also encounter problems

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renting a new residence, as well as other issues associated with having negative entries
on a credit report. Tenants who need to break their leases often must negotiate with their
landlords or seek legal counsel. In some cases, finding a new tenant for the property or
forfeiting the security deposit inspires landlords to allow tenants to break their leases
with no further consequences.

Some leases have "early termination" clauses that allow tenants to terminate the
contracts under a specific set of conditions or when their landlords do not fulfil their
contractual obligations. For example, a tenant may be able to terminate a lease if the
landlord does not make timely repairs to the property.

2.4.3 Loans

The terms of a loan are agreed to by each party in the transaction before any
money or property changes hands. If the lender requires collateral, this requirement will
be outlined in the loan documents. Most loans also have provisions regarding the
maximum amount of interest, as well as other covenants such as the length of time
before repayment is required. A common loan for American consumers is a mortgage -
a loan taken out to purchase a property.

Loans can come from individuals, corporations, financial institutions, and

governments. They offer a way to grow the overall money supply in an economy as well
as open up competition and expand business operations. The interest and fees from
loans are a primary source of revenue for many financial institutions such as banks, as
well as some retailers through the use of credit facilities.

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2.5 Differentiate types of medium term source of finance

2.5.1 Differences of Hire Purchase and Term Loan

a) Ownership

In hire purchase, the seller/financier owns the asset until the buyer makes the
final payment and hence the word “Hire” is used. Whereas in the term loan, the buyer
borrows money, pays for the asset, and own it immediately. So, in the case of hire
purchase, one cannot sell the asset if he runs into problems making periodic payments
but in the term loan, it can be sold.

b) Cost of the assets

The cost of the asset in case of the term loan is the cost at which the buyer
purchases + installation cost if any, whereas, in the case of hire purchase, the cost to the
buyer is normal cash price + HP Interest. The interest cost is incurred in case of term
loan also but that forms part of finance cost of the company and is not capitalized with
the asset.

c) Repossession of hires asset

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 It may happen that the buyer is unable to pay all the payments required under the
agreement. Once the buyer stops making the instalments, the seller/financier has the
right to take away the asset. This is called Repossession. In term loan, the borrower can
only take away the assets which are provided as security against the loan. Normally, the
purchased asset is the primary security of the term loan along with the collateral
security. So, the bank or financial institution can take away the underlying asset as well
as the collaterals.

d) Mortgage of assets in term of security

No security, in any form, is required for taking an asset on hire. Whereas the
borrowers need to pledge his assets as security in case of the term loan.

e) Financial statement

In hire purchase, the value of the asset is not included in the financial statements
since the owner is the financier company till the buyer pays the last hire charges
instalment. Whereas in the case of a loan, the value of asset appears on the asset side
and a corresponding liability for loans against such asset appear on the liability side.

f) Effect of taxation

In both the cases, i.e. when the asset is purchased by loan, or if it is taken on
hire, the user of the asset can take deduction on the depreciation of the asset (which
decrease every year due to written down value effect) and also for interest on term loan
or hire purchase instalments. The only difference being in the quantitative amount of
interest.

g) Cash flow

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 Since there is no purchase of an asset in hire purchase, the cash flow is limited
up to the hire purchase instalments. Whereas in a case of the term loan, the cash flow
includes down-payment, loan received, purchase of asset and instalment paid at the
required time.

The risk of Holding the Asset: In the case of hire purchase, there is an option
called “The Half-Rule” which states that the user can return the asset and terminate the
agreement at any time giving the seller/ financier a notice in writing. Whereas in the
case of loan financing, the user of the asset has to bear all the risk of asset devaluation
due to change in technology.

2.5.2 Difference between lease and hire purchase

a) Ownership of the asset

In a lease, ownership lies with the lessor. The lessee has the right to use the
equipment and does not have the option to purchase. Whereas in hire purchase, the hirer
has the option to purchase. The hirer becomes the owner of the asset/equipment
immediately after the last instalment is paid.

b) Depreciation

In lease financing, the depreciation is claimed as an expense in the books of the

lessor. On the other hand, the depreciation claim is allowed to the hirer in the case of
hire purchase transaction.

c) Rental payments

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 The lease rentals cover the cost of using an asset. Normally, it is derived with
the cost of an asset over the asset life. In the case of hire purchase, instalment is
inclusive of the principal amount and the interest for the time period the asset is utilized.

d) Duration

Generally, lease agreements are done for longer duration and for bigger assets
like land, property etc. Hire Purchase agreements are done mostly for shorter duration
and cheaper assets like hiring a car, machinery etc.

e) Tax impact

In the lease agreement, the total lease rentals are shown as expenditure by the
lessee. In hire purchase, the hirer claims the depreciation of asset as an expense.

f) Repairs and maintenance

Repairs and maintenance of the asset in the financial lease are the responsibility

of the lessee but in operating lease, it is the responsibility of the lessor. In hire purchase,
the responsibility lies with the hirer.

g) The extent of finance

Lease financing can be called the complete financing option in which no down
payments are required but in the case of hire purchase, the normally an amount of
margin money is required to be paid upfront by the hirer. Therefore, we call it a partial
finance like loans etc.

Businessmen can opt option of lease finance or the hire purchase but they should
be analysed properly as to how much the options suits to the business requirement and
situations.

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2.6 Advantages and Disadvantages Types of Medium Term Source of Finance

2.6.1 Hire Purchase

Advantages of hire purchase

a) Do not have to pay the full amount of the purchase upfront

This source of money with benefit more for companies that required higher
purchase plan where they required expensive equipment but do not need necessary
capital and do not want to increase debt by borrowing money.

b) Includes maintenance in the contract.

By including the maintenance cost in the contract, the company will not have to pay
any repair cost that may arise. Rental payments that have been expense can be more
advantageous than buying the equipment. Hire purchase plan has more benefit as the

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payments terms are more flexible. For example, if equipment is used seasonally,
payments can be made according to the level of the usage.

c) Fixed rate of interest

The monthly payment and the rate of interest payments are fixed throughout the
duration of the agreement which allows us to plan our outgoing cash flows accordingly.

d) Convenient.

Before a contract is signed, we can choose any terms and deposit that fit with our
budget as it can be discussed and adjusted before a deal is being made. The longer the
term of agreement, the lower the payments that will be made each month. We can do
tailor repayments based on our income as seasonal payments are available.

Disadvantages of hire purchase

a) High rate of interest

A buyer needs to pay this source with a higher price as they are many article
purchased that will be involve the procedures. Each article will be charged with higher
rate of interest which will cause the hire purchase cost to become more expensive.

b) Difficulties in recovering of instalment

The hire purchase sellers will not get the instalments from the purchasers on time.
The probability for the sellers to choose wrong buyers is high which may put them in
trouble. Some sellers need to waste their time and provide extra expenditure for the
recovery. Slowly, this will create serious conflicts between the buyers and the seller.

c) Break up of families

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 Hire purchase puts the purchases in a great financial burden to families who cannot
afford to buy costly and luxurious items. Researchers have found that most of the
broken families these days happened due to the hire purchasing buying’s

d) Artificial Demand

The dangerous effect of hire purchase demand is that hire purchase system slowly
creates artificial demand of the product to the buyers. This happens when the buyer
tempted to purchase the products even when they do not need or can afford to buy the
products itself.

2.6.2 Leasing

Advantages of financial leasing

a) Low capital expenditure

Leasing is an ideal option for a newly-set up business as it has lower initial cost.
Instead of paying all of the cost for the asset upfront, the buyer will only need to pay the
total cost over a certain period which will slowly reduce the cash flow in a particular
period. Payments will be due when the asset is generating cash flow which makes it
become more manageable.

b) Lower tax

For financial leasing, payments are considered as operating expenses. Therefore,

interest and tax are deductible. Lease payments can reduce taxable income in a more

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appropriate manner than depreciation expense. Financial leasing is being treated like
rental where the entire lease payments are being expense when business is done.

c) Flexibility

Asset flexibility can give financial leasing advantage. Based on the relationship
between the buyer and the seller, the lease can be between few months or the entire
expected life of the assets.

d) Obsolescence

Leasing payment can lead the company to work in obsolescence where the
company anticipates by replacing the fixed asset. For example, many larger clients lease
rather than purchase their equipment so they can stay with new and faster technology.

Disadvantages of financial leasing

a) Limited financial benefits

Lease payments will not give any beneficiary to a land business as the long-term
lease agreement have cause a burden for the business as the agreement is locked and the
expenses for the payments are fixed for several years. If the assets are not being serve
for several years, lease payments can become a burden.

b) Reduce return for equity holders

Lease expense can reduce the net income without any appreciation in value. This
means the equity of the shareholders will get limited return or returns are reduce.
Therefore, this will cause the shareholders to not achieve their objective of wealth
maximization.

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 c) Limited access to other loans

The investors of this source of finance will treat long-term leases as debt. Hence,
this have cause difficulties in other loaning for capital markets and raise further loans or
other forms of debt from the market.

d) Time-consuming

Financial leasing will have to go through many complex documentations. Most

of the assets needs to be examine before it is being lease. Therefore, all of the
documentations need to be done properly to avoid any difficulties in the future.

2.6.3 Loans

Advantages of loan from financial institution

a) Loan is not repayable on demand.

Loans are very flexible as we do not have to pay the exact moment at a
particular time. Instead, we can make regular instalment payments on time. Compared
to overdraft, loans are being paid full amount only when the bank demands for it. The
bank will not monitor on how the money is being use as long as payments are paid on
time.

b) Cost Effective

Compared to overdraft and credit cards, bank loans have the cheapest value in
terms of interest rates. The interest rate of a financial institution can be positive or

25
negative. Any borrowers that have an excellent amount of money can attain loan with a
lower interest are. Hence, this can make loan become less expensive. The borrowers
who have less amount of money can likely get loans with higher rates of interest which
caused the options to borrow money can be risky as a financial option. However,
interest rates can be fluctuating as well. Therefore, it is better for the borrowers to
analyse the interest rate first before loaning. With the proper amount of money and a
favourable market interest rates, we can produce a more cost-effective borrowing
environment.

c) Secured

In terms of security, loans ensure the monies that we loan are being kept safely
in our account. Other than that, monies that we paid through instalments will be receive
by the designated authority safely.

d) Convenient

Financial institution will allow an individual to seek for advice on financial

institution loaning before loaning. Hence, this will be convenient to those who have
zero knowledge on loaning. Other than that, customers can get greater facilities by
loaning as the small number of customers per branch can cause efficiency to be
achieved through large scale of operation.

Disadvantages of loan from financial institutions

a) Time consuming

Loaning can consume a lot of time as there are many procedures that we need to
go through. Most of the loans are under government criteria, therefore there are many

26
rigid rules and obligations that we need to obey before we grant for loans. Hence, more
formal procedures need to be done which delays the loaning process.

b) Restriction on autonomy of management

Most of the institution will appoint their nominees to the Board of Director of
the borrowing company. They will convertible the clauses in loan agreements. Hence,
this have cause the restriction of powers in the company.

c) Irregular Payment Amounts

Loans have variety rate of interest and the rate can change depending on the
market conditions. Therefore, it is difficult to determine the exact future payments that
we need to pay for future payments.

d) Repayment burden

Late payments of loan will cause the borrowers assets be seized. The company
can still report our credit bureaus which can negatively affect our credit. With low credit
amount, it will be more difficult to obtain loans.

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 CHAPTER 3

CONCLUSION

Deciding the right source of finance is a crucial business decision taken by top level
finance managers. Wrong source of finance increases the cost funds which in turn would have
direct impact on the feasibility of project under concern. Improper match of type of capital with
business requirements may go against smooth functioning of the business.

The setting of budgetary and monetary policies in the context of co-ordinated medium
term financial strategies stems from a recognition that budget deficits, though effective in
raising short-run demand, may have problematic longer-run implications. With restrictive
monetary targets designed to supress inflation expectations, higher government debt, interest
rates, debt service costs and/or higher tax rates would tend eventually to undermine the demand

28
effectiveness of long-term public-sector borrowing. Such deficits may also have detrimental
longer-run supply-side effects.

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