Business Financing

Lecture 4: Business Financing

Projected sales or revenue increases require increases in
funds to finance the required spending on assets (Ross
et al, 2010).
We call financing needs as external financing needs
(EFN).
EFN is the plug variable in order for the balance sheet
to be balanced.
External Financing Needs (EFN)
1. Lifland (2010) argues companies seek for external
financing in order to meet their working capital needs.
2. Meanwhile, Mulaga (2013) finds that small enterprises
require less external financing than the medium ones
do.
External Financing Needs (EFN)
The implications are:
1. To support growth means increasing external funds
needed;
2. The bigger a company is, the more it requires its
operations in order to support its expansions;
3. The previous point leads to the use of external funds
from external agencies to back up our business
expansions.
Business Financing
Why then do we need to learn the external fund
provider characteristics and the credit laws?
Loan Financing Types
1. Banks;
2. Capital Venture;
3. Factoring;
4. Lease;
5. Capital Market.
Banking
Law No. 10 of 1998 on Banking regulates any banking
activities in Indonesia, including financing activities.
Definition of Banking:
Article 1 point 1:
‘Banking is anything related to a Bank, comprising the
institutions, business activities, and procedures as well
as processes in the realization of such business
activities.’
Banking
Definition of Bank:
Article 1 point 2:
Bank is a corporate entity mobilizing funds from the
public in the forms of Deposits and channeling them to
the public in the forms of Credit and/or other forms in
order to improve the living standards of the common
people.’
Banking
Definition of Credit:
Article 1 point 11:
‘Credit is the provision of money or equivalent claim to
money based on a loan agreement between a Bank and
another party, obligating the borrowing party to repay
his debt after a certain period with interest.’
Banking
Types of Bank’s Loans (Naja, 2008):
1. Productive Loans;
Loans given to any business entities to fund any
produces and services necessary for generating
profits.
There are two forms of this loan:
1. Working capital loans
Loans given to finance daily fund needs in order to produce goods and
services.
2. Investment loans
Loans given to meet capital expenditure or services needs.
Banking
2. Consumption Loans
Loans given to individuals to satisfy their consumption
needs.
The loan installments are taken from debtors’ fixed
income.
Banking
Duration Types of Banking Loans:
1. Short-term loans
Loans due less than one year;
2. Medium-term loans
Loans dues between one to three years;
3. Long-term loans
Loans maturing more than three years.
Banking
Types of Collaterals:
1. Individual collaterals;
Third party(s) becomes the liable agent to pay the debts
committed by the debtor(s).
2. Mortgage collaterals;
The debtors or third parties must submit their properties
as the collateral for the committed debts.
Capital Venture
What is Capital Venture?
1. ‘Money provided by investors to startup firms and small businesses with
perceived long-term growth potential. This is a very important source of
funding for startups that do not have access to capital markets. It typically
entails high risk for the investor, but it has the potential for above-average
returns’ (Investopedia, 2014).
2. ‘Venture capital is a type of equity investment usually made in rapidly
growing companies that require a lot of capital or start-up companies that
can show they have a strong business plan. Venture capital may be provided
by wealthy individual investors, professionally managed investment funds,
government-backed Small Business Investment Corporations (SBICs), or
subsidiaries of investment banking firms, insurance companies, or
corporations’ (Inc, 2014).
Source:
http://www.inc.com/encyclopedia/venture-capital.html
http://www.investopedia.com/terms/v/venturecapital.asp
Capital Venture
Characteristics of Capital Venture (Fuady in Naja,
2008):
1. Capital and management participation;
2. Temporary equity participation;
3. High returns orientation;
4. Long-term Investments;
5. Equity participation;
6. No assets-backed collaterals;
7. Investment participations in young, high growth potential firms;
8. Investments in non-bankable start-up firms.
Capital Venture
Involved Parties in Capital Venture:
1. Venture Capitalists;
2. Business Partners (investees);
3. Investors.
Capital Venture
Types of Venture Capital Investors:
1. Angel Investors;
‘An investor who provides financial backing for small startups or
entrepreneurs. Angel investors are usually found among an entrepreneur's
family and friends. The capital they provide can be a one-time injection of
seed money or ongoing support to carry the company through difficult times’
(Investopedia, 2014).
2. Institutional Investors;
‘A non-bank person or organization that trades securities in large enough
share quantities or dollar amounts that they qualify for preferential treatment
and lower commissions. Institutional investors face fewer protective
regulations because it is assumed that they are more knowledgeable and
better able to protect themselves’ (Investopedia, 2014)
Source: http://www.investopedia.com/terms/a/angelinvestor.asp
http://www.investopedia.com/terms/i/institutionalinvestor.asp
Capital Venture
Keputusan Menteri Keuangan Republik Indonesia
Nomor 469/KMK.017/1995 tentang Pendirian dan
Pembinaan Usaha Modal Ventura regulates any capital
venture firms’ activities in Indonesia.
Minimum capital reserves for venture
capitalists in Indonesia:
Source: http://www.scribd.com/doc/200896844/Ukmc-Feui-09-bahan-Modal-Ventura-Bapepam
Mechanism of Equity Participation for
Venture Capitalists in Indonesia
Factoring Company (Anjak Piutang)
According to Keputusan President Nomor 61 Tahun
1988 tentang Lembaga Pembiayaan,
‘Factoring company is a business entity doing financing
activities in forms of purchases and or transfer, as well
as settlements of account receivables or any short-term
claims of its client’s trading transactions domestically
and internationally ‘ (Naja, 2008).
Factoring Company (Anjak Piutang)
Types of Factoring (Naja, 2008):
1. Full service factoring;
2. Recourse factoring;
3. Bulk factoring;
4. Maturity factoring;
5. Agency factoring;
6. Invoice factoring;
7. Undisclosed factoring.
Factoring Company (Anjak Piutang)
Involved parties in factoring:
1. Factoring firms;
2. Clients;
3. Customers.
Lease
Lease is defined as:
‘A legal document outlining the terms under which one
party agrees to rent property from another party. A lease
guarantees the lessee (the renter) use of an asset and
guarantees the lessor (the property owner) regular payments
from the lessee for a specified number of months or years.
Both the lessee and the lessor must uphold the terms of the
contract for the lease to remain valid’ (Investopedia, 2014).
Source:
http://www.investopedia.com/terms/l/lease.asp
Lease
Types of Lease (Naja, 2008):
1. Operating Lease;
Lessor lends his/ her assets to lessee without an option for the lessee to own the
assets after the rental duration is over.
2. Financial Lease;
Lessor lends his/ her assets to lessee with an option for the lessee to own the assets
after the rental duration is over.
3. Finance Lease;
Lessor pays for the asset needs of lessee. Lessee has to pay for the lease fees
periodically and the interests charged by the lessor.
Lease
Involved parties in Lease:
1. Lessors;
The provider of the properties to lend to clients.
2. Lesses.
The users of the properties owed by lessors.
Capital Markets
Capital markets are defined as:
‘Markets for buying and selling equity and debt instruments. Capital
markets channel savings and investment between suppliers of capital such
as retail investors and institutional investors, and users of capital like
businesses, government and individuals. Capital markets are vital to the
functioning of an economy, since capital is a critical component for
generating economic output. Capital markets include primary markets,
where new stock and bond issues are sold to investors, and secondary
markets, which trade existing securities’ (Investopedia, 2014).

Source:
http://www.investopedia.com/terms/c/capitalmarkets.asp
Capital Markets
Types of effects sold in the Indonesia Stock Exchange
(IDX):
1. Common stock;
2. Preferred stock;
3. Warrants;
4. Options;
5. Bonds.