SECTION 8: BUSINESS FINANCE

FINANCIAL INSTITUTIONS
1. The Central Bank acts as a banker to the government and the banking system and acts as the
authority responsible for implementing the government’s monetary policy. It is often referred to
as THE BANK in its home country. E.gs. the Central Bank of Trinidad and Tobago. Functions
include:
a) It is the government’s bank
- It transacts the government’s financial business
- It carries out government financial policy
- It manages the exchange equalisation account – it holds and protects the gold and foreign
currency reserves of the country
- It arranges the issue of government loan stock
- It acts as registrar of government stocks – it keeps a register of holders, transfers and so on
- It is the government’s agent for selling treasury bills via the money market
- It gives the government advice on financial and economic measures
- It supervises the banking system
b) It issues currency
The central bank has the sole responsibility for the physical operations relating to the issue
of currency.
c) It is the banker’s bank
Each of the commercial banks has an account with the central bank, and during the process
of cheque clearing and other inter-bank transactions, debits and credits are made to these
accounts as a means of inter-bank settlement. The commercial banks rely on the central bank
if they run short of money.

BANK A BANK B

d) It is the lender of last resort

If the commercial banks run short of cash they first recall deposits they have in the money
market, thus reducing money in the market. If they still have insufficient funds, the banks are
forced to borrow. When they cannot obtain sufficient funds from normal sources they are
obliged to go to the central bank for funds ‘as a last resort’.

2. A Commercial Bank is a form of financial intermediary. It accepts deposits and channels some
of those deposits into lending activities. Commercial banks provide banking services to
businesses and individuals. They provide basic money transfers and transmission services,
allowing users to overdraw on their accounts if necessary. Commercial banks services include:
a) Safety: they enable individuals and businesses to deposit money they do not need for
immediate use in a safe place.
b) Spending Control: they enable customers to decide how they want to use their money
without the need to carry ready cash.
c) Interest: some forms of bank account may pay a reward (called interest) but banks may
under some circumstances actually charge customers for leaving their money with them.
d) Services: they provide a wide variety of services such as loans, overdrafts, cheques and other
forms of money transfer facilities, including automatic teller machines (ATMs), credit cards,
debit cards, telephone banking, provision of foreign currency and international payments, as
well as electronic transfer facilities, and much more.

Types of bank account include:

- Savings account (deposit account): an interest bearing account used to deposit money at a bank
(credit union, building society), where the customer earns interest (calculated as a percentage of

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 the money in the account) on the account. It is used by individuals and business to keep money
not required for immediate use in a safe place. No cheques are issued with this type of account
and a transfer to another person is done by cash or electronic banking transfers. The bank
requires prior notice for the withdrawal of large sums of money because they lend the money
deposited to others (one way a bank earns money). Depositors cannot withdraw more money than
they have in their account (account cannot be overdrawn).
- Current account (cheque account): facilitates the transfer of money from one account to another
without using cash. The account holder is issued with a paying-in book of credit slips (to pay
money into the account), a chequebook (to pay others) and various bank cards. It provides a safe
place for keeping money that needs to be available for immediate use. The bank sends the
account holder a bank statement on a regular basis to indicate how much has been paid into the
account, how much has been paid out, any charges the bank has deducted from the account and
the balance left in the account at the time the statement was issued.

3. Non-Bank Financial Institutions:

a) Credit Union (form of Co-operative): a community savings and loans provider set up by a
group of people to benefit a particular community. It aims to promote thrift (habit of saving),
provides credit at competitive rates and other financial services. Credit unions offer three
main types of financial product: current accounts, savings accounts and loans. They are
not-for-profit organizations, formed by people who have something in common such as:
- living in a particular area, locality, community
- those in a particular type of occupation or form of industry
- members of a particular group, e.g. trade union or church
b) Insurance companies: lend large amounts of money to borrowers. They also invest some of
the money they take in premiums in various forms of business activities (e.g. as equity
capital) and also in the form of interest-bearing loans to those engaged in entrepreneurship.
c) Building societies: are owned by its members, that offers banking and other financial
services, especially mortgage lending. They just like mortgage banks, accept deposits,
mainly from the general public (and some businesses), on which they pay interest and use
the funds to finance mortgages (long-term loans to purchase property). Businesses need
mortgages on property just as individuals do.

4. Micro-Lending Agencies: Micro-Finance is recognised as a tool to alleviate poverty that is

aimed at millions of people who do not possess access to traditional banking facilities because,
typically, they lack collateral or are too poor, illiterate, unemployed or have poor financial record.
Micro-lending Agencies are part of micro-finance. They lend small amounts of money (micro
loans) to such persons which help them survive and aims to encourage self-sufficiency and
independence as well as self-employment and entrepreneurship. The scheme has produced many
success stories as it has enabled people to buy materials to make products by hand, and even
open a small shop. Micro-finance is not a charity; the loans have to be repaid to the original
lenders. It can have a ‘ripple effect’; there are lots of examples illustrating how the initial success
of the loan expands to involve the wider family of the original borrower and even extends to
providing improved education of young children. Micro-credit is the part of micro-finance that
provides a wider range of services, including savings accounts for the poor.

5. Government Agencies (often an appointed commission): are responsible for the oversight of
specific functions for the government. The Ministry of Finance has overall responsibility for
developing the government’s fiscal and economic policy and may encompass other departments
such as the Ministry of Commerce and the Ministry of Business Development. The ministry
would be responsible for overseeing and regulating the collection and allocation of public
revenues, as well as playing an important part in the socio-economic development of the country
by creating a society that promotes a better standard of living for all citizens. To achieve this,
such a ministry will aim to promote economic growth and effectively manage the economy. The
ministry will also have regulatory roles, such as a commission of Financial Services and a

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 Financial Investigations department (to investigate fraud, money laundering etc.). Such a
department will also embrace the regulation of specific financial institutions such as insurance
and taxation.

FUNCTIONS AND SERVICES OF FINANCIAL INSTITUTIONS

1. Loans and Credit facilities: Commercial banks are the main source of these, where businesses
hold its bank account. A bank loan (bank advance) is a type of credit created by the advance of a
specific sum of money by the bank (lender) to a business/individual (borrower). It is extended for
a specific period of time, on fixed interest terms. The interest paid is often related to the basic
rate of interest, with the principal sum being repaid either on a regular instalment basis or on an
agreed redemption date.
Depending on the nature of the loan and the degree of risk involved, a bank loan may be secured
or unsecured. A secured loan requires the borrower to provide the bank with collateral security
such as property deeds. The collateral security allows the bank to sell such collateral if the loan is
not repaid. An unsecure loan is supported by the borrower’s creditworthiness and not by
collateral, and will only be granted to a borrower with a high credit rating.
A bank overdraft enables an individual/business (borrower) to spend more than is in the bank
account. Interest is charged on a daily basis on the amount overdrawn on the day. Overdraft
facilities for businesses are provided on an on-going basis, thus giving the borrower a continuous
credit arrangement. An overdraft are often used to finance working capital requirements and if
managed well can be relatively cheap and a flexible form of borrowing.

2. Savings and Deposits: Savings are an amount of disposable income not spent on consumer goods
that have been accumulated and placed in a safe place to earn some form of reward (interest).
The amount of interest paid to the saver depends on how long they can leave the money
untouched. Money from savings accounts can be withdrawn at any time. Financial institutions
know that there will always be a regular balance in their possession that is untouched and
available for other short-term use. Banks and other savings institutions lend a percentage of the
funds to borrowers for short periods, thus providing short-term finance to borrowers, including
businesses.

3. Making payments
- Cheque: a written instruction to the bank (drawee) to pay money to the account holder (drawer)
or to another person (payee). On the cheque the drawer must enter the date the cheque is written,
the name of the payee, the amount to be paid in words, the amount to be paid in figures and the
signature of the drawer. One of the inconveniences of using cheques for payment is the time it
takes to process them, and this is the reason other methods of payments are sometimes preferred.
- Credit card: enables owner to buy goods or services from a trader without using cash or cheque.
It is a kind of loan because the cardholder is borrowing from the card provider to pay for
purchases. The purchaser inserts the card into a terminal when making purchases, and enters their
personal identification number (PIN) known only to them. The credit card provider pays the
amount due, minus a service charge levied on the trader. The cardholder can pay the amount due
in full and immediately without having to pay interest, or delay payment for which a charge is
made. Therefore, credit cards allow users to make purchases immediately and pay at some later
date. But some traders will not accept credit cards, or impose a charge for their use. This is
because the trader is charged a percentage fee by the credit card company. They will sometimes
pass this charge on to the purchaser, causing them to consider whether to use the card or not.
- Debit card: issued by banks to their customers, allowing them to withdraw money from ATMs or
make purchases without using cash or cheque. The purchaser presents the card to the trader’s
payment terminal, enters their PIN and the amount due is withdrawn from their account. If there
is not enough money in the account, the purchaser will be rejected. Most traders are happy to
accept payment by debit card, because the purchase price is withdrawn immediately from the
purchaser’s bank account and transferred into the trader’s account.

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- Electronic Funds Transfer (EFT): the electronic transfer of money from one bank (other financial
institution) to other using computer-based systems. One of the most widely used EFT programs
used by businesses is the process of paying wages directly into an employee’s bank account. In
effect, credit card and credit card processes are affected through EFT. EFT enables users to carry
out banking using their personal computer (e.g. at home) or via their smartphones (e.g. on the
move).
- Standing order: an instruction to a financial institution to making regular fixed payments to
another person or company automatically (by EFT). The payment is usually at set periods (e.g.
once a month), on a particular date, for a set period of time (e.g. 12 monthly payments).
- Direct debit: a variation of the standing order in which the account holder gives another person or
company permission to make withdrawals directly from their account by EFT, and the amount
may vary (e.g. electricity and telephone bills).
- Mobile wallet: an app running on a mobile device such as a smartphone or tablet to manage
mobile commercial activities such as supporting payment cards (credit and debit cards) when
making purchases.

4. Investments: involves putting money into some form of asset with the aim of making a financial
gain that is different and larger than interest. It involves a greater degree of risk and there is no
guarantee that the investor will get his money back. Investing involves committing money into
monetary assets such as stocks and shares. A stock is the ownership of certificates in any
company, and a share refers to ownership of a particular company. The hope is that the money
invested will grow, but there is the possibility that the money invested could shrink, or even
disappear completely.
Investment trusts are companies that take the money of those who invest in their company (e.g.
buying units) and reinvest it in other companies. They do this in order to spread the risks by
investing in a number of companies.
Bonds are debt securities that have a similarity to an IOU. Borrowers such as large companies
and governments (both central and local) issue bonds to raise money from investors (and trusts)
willing to lend them money for a set period of time. The longer the time period, the greater the
return. When investors buy a bond they are lending for a specified period of time. Bonds pay a
rate of interest that is significantly higher than other interest-bearing investments.

SERVICES OFFERED BY FINANCIAL INSTITUTIONS

1. Night Safe Deposits: a service offered by banks. They are boxes in the outside wall of the bank,
usually next to the ATM. They allow individuals and business customers to deposit money
outside of branch opening hours. Customers deposit their in-payments, in special envelopes
provided, together with information about the amount being deposited and their account is
credited the next working day. Night safes offer greater peace of mind to users, e.g. a trader does
not need to worry about the safety of money earned through trading outside normal banking
hours and the funds are added to the trader’s account when the bank opens.

2. Online Banking (internet banking or virtual banking): is an electronic payment system that
enables account holders to conduct financial transactions on a website operated by their bank.
Users can view their accounts and perform routine transactions, e.g. account transfers and pay
bills and they can lodge enquires online too. It is possible in some to set up standing orders to
make regular payments and to access and manage loans and credit card applications online.

3. Advisory services: financial institutions are particularly helpful with advisory services for small
businesses where there is less management expertise. These advisory services include:
- Business account services demonstrating how the business can use facilities effectively to
maintain efficiency, e.g. payment of wages directly into employees’ accounts.
- Cash management facilities such as payroll services, deposit services, e.g. out-of-hours deposits
and short-term investment possibilities for surplus funds.
- Overdraft facilities to aid temporary cash flow and the implications involved for profitability

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- Business loans and other sources of finance including start-up an expansion capital
- Merchant services such as credit card processing and reconciliation.
- Digital banking advice, e.g. using electronic funds transfers to collect and process payments
quickly and maintain cash flow.

4. Credit and Debit cards

5. Trustee work: Trustee is a legal term referring to someone who holds property, authority or a
position of responsibility for the benefit of others. Banks and other financial institutions have a
trust department to act as trustee on behalf of clients. This department will administer financial
assets on behalf of clients. The assets are typically held in the form of a trust, that is, a legal
document that identifies who the beneficiaries are and how the assets can be used.

6. Deposit boxes: Safe boxes are available to customers, for a fee, and are used to store valuable
possessions such as precious metals, gemstones and jewellery, currency and important documents
(e.g. wills, property deeds and even computer data) that need protection from fire or theft. Safe
deposit boxes are contained within the vault of financial institutions.

7. Automated Teller Machine (ATM): an easy way for bank customers to take cash out of their
accounts outside banking hours and almost anywhere in the world where there is an ATM. When
a customer opens a bank account they are issued an ATM card (acts as a debit card). To use an
ATM, the user enters a personal identification number (PIN). The PIN consists of a secret
combination of numbers or letters created by the user to protect the card from fraudulent use.
Automatic Banking Machine (ABM): enables bank customers to perform several operations in
their bank without help from a teller, e.g. withdrawing cash, making deposits, paying bills,
obtaining bank statement and effecting cash transfers.

8. Electronic trade (E-trade): a financial service that enables investors to actively manage their
investment portfolios and carry out investment trades. The transactions are effected quickly using
a computer (or a smartphone). The usual procedure is that the user will log in to a website and
make transactions through dealers and exchange specialists. The benefit of e-trade is that the user
is in control of the transactions, and at a cost cheaper than carrying out the whole process through
a dealer.

9. Settlement services: the reason that the cheque system, debit cards and credit cards systems and
others work. E.g. when a customer pays a trader using a credit card, the actual payment to the
trader appears in their account as a result of the settlement being facilitated by the credit card
company.

10. Remittance service: Remittance is the funds that an expatriate, e.g. someone working abroad
sends money back to their country, or funds sent to a person overseas. It is the facilities provided
by the financial institutions that enable such transfers to take place.

FINANCIAL REGULATORY BODIES

Financial regulations are the rules that govern what financial institutions, such as banks and others
that receive deposits and make loans, can do. These regulations are overseen by a number of agencies
including:
1. Central bank: responsible for overseeing the monetary system for a country and this includes
regulating banks and other financial institutions, as well as managing the economy.
2. Independent Statutory Bodies: A statutory body is a body set up by law which is authorised to
enact legislation on behalf of the country, e.g. the Jamaican Development Insurance Corporation
(JDIC) is the regulator for the insurance industry. The main objective of the JDIC is to provide
insurance against loss of depositor’s funds through management of the Deposit Insurance Fund.

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 This basically ensures that policyholders are safeguarded by a pool of money accrued from
premiums paid, against losses caused by failed institutions.
3. Financial Services Commission (FSC): are charged with supervising and regulating a country’s
financial system to ensure the safety, stability and integrity of the system. They do this through:
- Administration of related laws such as the licensing or registering of financial institutions
- Supervising and regulating the operations of financial institutions
- Establishing standards for institutional strengthening, for the control of risks in the financial
sector and for the protection of consumers and creditors
- Promoting stability, public awareness and confidence in the operations of financial institutions

The relationship between Financial Institutions and Regulatory Bodies

Regulatory bodies are an executive branch of the government and they have statutory authority to
perform their functions. They are established to enforce standards and to oversee and regulate various
commercial activities, including financial services.
If a regulatory body has reason to believe that a business has violated its regulations, the body will
implement an investigation. Based on this investigation, the regulatory body will demand corrective
action if necessary and possibly impose any penalty that it considers appropriate and that it is
authorised to impose.
Good regulatory outcomes depend on more than well-designed rules and regulations. The role of
regulatory bodies is to guide as well as regulate. A good regulatory environment requires guidance
and encouragement. In this respect good regulatory bodies are a key aspect of encouragement and
innovation across the economy and foster productivity and growth.

ROLE OF REGULATORY BODIES

To monitor, control and guide various industry sectors in order to protect consumers.

Regulatory role of the Central Bank

- Changing the liquid assets ratio: Commercial banks are required by bank regulations to hold a
certain percentage (liquid asset ratio) of their highly liquid financial assets in the central bank.
Highly liquid assets are those that can be converted to cash at short notice, e.g. cash reserves and
government bonds. This is necessary to ensure that the commercial banks can meet all their
anticipated expenses, e.g. meeting demands from their creditors – customers and fund loans. But
it is also a way of the central bank influence economic activity. If the central bank implements a
rise in the liquid assets ratio, this has the effect of increasing the amount the banks must deposit
with them, which reduces the amount of money in circulation and restrict borrowing.
- Varying/adjusting the bank rate: The bank rate (minimum lending rate) is the interest rate at
which a nation’s central bank lends money to commercial banks, often in the form of very
short-term loans. Managing the bank rate is one of the ways that central banks influence
economic activity. Lowering bank rates can help to expand economic activity and higher bank
rates help to reduce economic activity when inflation is higher than felt to be desired.
The commercial banks set the rate they charge for lending to slightly higher than the minimum
lending rate. Consequently, the raising or lowering of the bank rate by the central bank has an
influence not only on the banking system, but also on those who borrow from the system. E.g. the
return on savings will be lower with a reduce rate, while the cost of borrowing, e.g. for loans and
credit card use, mortgages, will rise if the bank rate is raised.
- Changing the minimum reserve arrangements: All banks and other lending institutions are
required to hold minimum reserves with the central bank to ensure they always have sufficient
funds to meet significant withdrawals. The central bank demands minimum reserves are held
before it will allow banks to draw on them. Increasing of the reserve ratio by the central bank
means that the lending financial institutions have less money available to lend out, resulting in a
reduction in the money supply. An increase in the amount of money in the economy results in
increasing spending. A decrease has the opposite effect.

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Regulatory role of the Financial Services Commission: The FSC has the responsibility of ensuring
those involved in the provision of financial services comply with the related Acts that aims to protect
investors. Although these laws may be slightly different from one country to another, they will all
follow a similar format to the following:
- The FSC act and regulations, which outlines the responsibilities of the FSC as they pertain to all
prescribed financial institutions.
- The Insurance Act and regulations, which prescribe provisions for the regulation of insurance
businesses.
- The Securities Act and regulations, which provides requirements for the licensing, operation and
supervision of entities dealing in securities.
- The Pensions (Superannuation Funds and Retirement Schemes) Act and regulations, which
provide requirements for the licensing, operation and supervision of private pension funds.
- The Unit Trust Act and regulations, which provides requirements for the licensing, operation and
supervision of Unit trust schemes.
Regulatory role of the Supervisor of Insurance: The Supervisor of Insurance has the responsibility
of ensuring that those in the insurance industry, such as insurance companies, underwriters and
intermediaries, e.g. insurance agents, insurance brokers and financial advisers comply with all
legislation that applies to insurance. This responsibility encompasses:
- Licensing companies and insurance intermediaries
- Ensuring payment of annual fees
- Monitoring insurance companies and the statutory funds they are required to hold
- Ensuring all licensed insurance entities comply with the requirement of the Insurance Act and all
related regulations.

FUNCTIONS OF REGULATORY BODIES

To enforce regulations and license of various financial activities, including depository, lending,
collection and money transmission activities.

MANAGING PERSONAL INCOMES

Personal income refers to total earnings of an individual from all income sources, such as wages,
savings and investment returns.
- Budgeting: A personal budget is a financial plan that allocates future personal income towards
expenses, savings and debt repayment. Personal budgeting is important because it helps to ensure
that a person, or family always has enough money for their needs – which must always be a top
priority. It is often the case that debts are caused more often by wants rather than needs.
- Saving: the money a person has set aside instead of spending, and placed in an account in a bank
or a similar financial institution. Regular saving is an important aspect of personal budgeting
because not only does it provide a way of meeting predicted expenses, it can also give an added
bonus by earing interest – an amount paid by the financial institution where the money is saved
as a ‘reward’. Saving gives ready access to cash, but holds it in a safe place and is typically used
for smaller, short-term goals in the near future.
- Investment: is used to achieve long-term goals, such as saving for a holiday or to buy furniture
for your home. Investing makes it more difficult to get your hands on the cash quickly, but can
achieve a greater reward (return on the money invested).
- Financial advice: banks, credit unions and building societies will advise customers completely
free of charge on the most appropriate types of account to use for savings as well as investment
products. Some of these services will even give people advice on forming and maintaining a
personal budget.

FORMS OF SAVINGS
1. Sou sou (partners/box turn): refers to saving in turn. It is a rotating savings club where a group
of people co-operate by contributing an equal amount of money into a fund on a weekly,
bi-weekly or monthly basis. The total pool, known as a hand, is then paid to one member of the
club on a previously agreed schedule. The pool rotates until all members have received their

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 share. The sou sou encourages a form of planned saving and helps members to purchase some
substantial item at some time in the future.
2. Credit unions: are intended to help people requiring saving facilities. They aim to encourage
thrift. They offer a basic bank account, often with a debit card, but no credit cards or a cheque
system. The control of the union lies with the members, with one vote per member. Members
pool their savings into a common loan fund, from which for ‘approved’ purposes, such as house
repairs or medical bills, loans are made to members at a low rate of interest.
3. Deposits in Financial Institutions: many registered and regulated financial institutions provide
basic savings accounts where money can be kept safe and earn a modest amount of interest to
savers. These are not chequebook accounts. Many savings accounts require notice of withdrawal
for substantial amounts of money.
4. Short-term fixed deposits: are a method of savings whereby an amount of money is placed with a
financial institution for a fixed term, e.g. one year. If the sum deposited is withdrawn a penalty is
imposed. The amount deposited is the short-term fixed deposit. Short-term fixed deposits provide
a better rate of return (interest) than savings accounts, but they do require the commitment of the
savings to be untouched for the term that applies.

FORMS OF INVESTMENT
1. Deferred Income: is investing, with a delayed and uncertain reward. E.g. if you invest in shares,
you will not know for some time how much return you are going to get, if any at all.
2. Risks Bearing: investment risk refers to the possibility or likelihood of losses from an investment
venture. Risk is a features of many forms of investment. The degree of risks varies depending on
where the investment is placed, but the degree of returns also varies.
3. Stock Market (equities market): involves the sales of equities, that is, shares (stock) in the
business. It is the place where shares of publicly-listed companies are traded. It is the primary
market where companies raise capital for their business by selling shares.
4. Government securities, Bonds, Debentures: a government security is a bond issued by the
government with a promise of repayment upon the security’s maturity date. They are generally
long-term securities with the highest market ratings and are one of the safest forms of investment,
hence they are often referred to a gilt. They are issued by the government in a set number of units
over a fixed term. They promise to pay a fixed income over a fixed term. Investors are repaid the
nominal capital value when the gilt matures.
Bonds are also issued by businesses as a means of borrowing long-term funds. They also promise
to pay back the loan on maturity. They are purchased by individuals, commercial banks and
institution investors such as pension funds, who hold them as a form of portfolio investment.
A debenture is a debt security issued by the government (also limited companies) to raise money
that is not secured by specific assets but rather by the general credit worthiness of the issuer.
They are long-term loans that are normally repayable to the investor on a fixed date, e.g. one year
to even ten years and pay a fixed rate of interest that is significantly higher than that given for
savings.
5. Mutual funds: are made up of a pool of funds collected from many investors, for the purpose of
investing in securities such as bonds, stocks and other money market instruments. Mutual fund
managers invest the fund’s capital in order to achieve capital gains for the fund’s investors. It is
an ideal method of investment for regular investors who do not have sufficient knowledge about
investing themselves. For a small fee they get the use of knowledgeable experts who spread the
risks involved in investing.

SHORT-TERM AND LONG-TERM FINANCING

Short-term financing is finance that is obtained for a term of one year or less. Often a business needs
short-term financing to use as working capital. Working capital is the money that a business needs
for day-to-day operations of the business. Short-term loans tend to have higher interest rates than
long-term loans. Types of short-term financing include:
1. Trade credit: the process of providing business customers with time (deferred payment) to
arrange payment for goods they have received. This period generally consists of interest-free

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 credit, which helps the receiver of the goods to achieve cash flow at the expense of the supplier’s
cash flow. Typically, the trade credit period is 30 days after receipt of goods, although it can be
longer, especially for long-standing customers who make regular purchases.
2. Commercial bank loans: all commercial banks offer an overdraft facility. A bank overdraft
ensures that funds are in place to meet short-term emergency by allowing a business to use more
funds than that held in their account. Commercial banks also provide short-term loans. Bank
loans (bank advance) is a type of credit created by the bank (lender) to a business/individual
(borrower). It is extended for a specified period of time, usually on fixed-interest terms.
3. Promissory notes: put the terms of a loan in writing, including how and when the money will be
paid back. It binds the borrower to the agreement by law. It is an unsecured promise by a party
(promissory) to another person (promisee) to pay a specified sum on demand, or on a fixed date.
4. Instalment credit (hire purchase): enables a business/individual to buy a product/service and
pay the amount owed in monthly instalments until the last instalment of repayment is paid, at
which point the borrower becomes the actual owner of the item. A mortgage is also a form of
instalment credit.
5. Ingenious credit or private money lenders: a money lender is a person/group whose business is
to lend money to others, e.g. personal loans. They charge relatively high rates of interest, but lend
in situations where other lenders would not lend, such as when the borrower do not have a good
credit history. They will, e.g. lend to people such as compulsive shoppers and gamblers, but also
to businesses struggling to survive.
6. Advances to customers: it is not unusual for customers to pay in advance for goods and services
they have yet to receive and even to finance start-up businesses, e.g. purchasing a vehicle. Many
established businesses operate similarly, e.g. lawyers, accountants, financial advisers and IT
technicians often require a ‘retainer fee’.
7. Factoring: debt factoring is the provision of finance by one business (the factor) to another firm
(the client) by discounting unpaid invoices that the client has issued to customers. Factoring
occurs in both domestic and export businesses. It can be particularly useful in foreign trade
because the payment time for goods traded internationally tends to be two to three times longer
than in home trade due to the time it takes to execute and obtain payment.
8. Venture capitalists: venture capital is a type of funding for a new or growing business. It usually
comes from firms that specialise in building high-risk portfolios. Typically, a venture capital firm
gives funding to a start-up company in exchange for equity (shares) in the start-up business.
9. Crowdfunding: crowdfunding campaigns, often encouraged by existing enterprises, are
worldwide campaigns to help entrepreneurs raise funds for their business (social activist projects)
by pooling the small contribution of funds from many people to make something larger happen.
Crowdfunding uses social media to attract donations from many people to fund a project and is
relatively a new way of raising money for worthwhile projects and business ventures on a
worldwide basis.
10. Angel investors: specialise in investing in early-stage or start-up companies in exchange for
equity ownership interest. Angel investors group together the funds of many small investors and
invest in a group of start-ups, thus spreading the risks. Angel investors are interested in:
- The passion and integrity of the business founders
- The potential (and unique) market being targeted
- A clearly thought-out business plan
- Interesting technological or intellectual property
- An appropriate valuation with reasonable terms
- The viability of raising further capital as the business progresses

Long-term financing consists of loans and financial obligations lasting more than one year.
Long-term debt for a business would include financing of leasing obligations or a long-term
mortgage.
1. Loans from Government Agencies

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- Government grants: a government-sponsored grant can provide a much-needed boost to working
capital and an opportunity for business growth. Grants are generally limited to certain types of
organizations, e.g. organizations engaged in cultural development.
- Government loans: usually take one of two forms: either the government loans the money
directly via a publicly-owned bank, e.g. the Caribbean Development Bank, or indirectly through
a regional business loans fund. There will be stringent criteria attached.
- Government equity investments: an ownership stake in the company is purchased, rather than
lending the money.
2. Private long-term financing
- Mortgages: a special type of long-term source of finance for buying property, where monthly
payments are spread over a number of years, and the property acts as collateral against the loan
until it is repaid.
- Debentures: the most common form of long-term loan that are taken out by companies. These
loans are generally repayable on a fixed date. The cost of this borrowing is the payment of a fixed
rate of interest.
- Shares (equity capital): involves giving up part of the ownership of the business to others and
giving them a share in the business and a say in how it is run.
- Insurance companies: provide long-term loans to businesses using some of the funds they accrue
in order to meet claims from their customers. Insurance is also a way to extend a company’s cash
flow on a long-term basis.
- Capital investment: refers to funds invested in an enterprise to further its business objectives.
This type of long-term finance for business is available from a wide number of sources, including
equity investors, banks and other financial institutions.
- Unit trusts: collect money from many small investors and use the pool of money they collected to
buy shares, bonds, property or cash assets in other investments. This includes providing
interest-bearing loans to businesses.

CAPITAL FOR SETTING UP A BUSINESS

Capital refers to money, tools and other equipment and items of value that are owned by the business.
Fixed capital includes items such as buildings, machinery and other equipment with a long life,
which are used many times over in the production of goods and services and creation of further
wealth (growth).
Working capital is the firm’s short-term assets, which are turned over fairly quickly in the course of
business. They include cash, bank balances, items held in stock, work in progress, finished goods and
other items required for the day-to-day operation of the business and which are continually being
used up.

Sources of start-up capital

1. Personal sources such as savings. These are important not just because they provide a resource,
but also because they demonstrate that the entrepreneur is not just relying on others to take the
risk of financing their venture.
2. Borrowing from friends and family is a common way to raise start-up capital as it is much
cheaper than borrowing from the bank. However, there is a stress factor to consider since family
and friends are hurt as well as the entrepreneur if the business runs into difficulties or fails.
3. Credit cards
4. Government grants
5. Banks
6. Suppliers and customers
7. Equity
8. Angel investors
9. Venture capital
10. Crowdfunding

FINANCIAL RECORDS FOR SLE TRADERS

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Bookkeeping is simply the recording of financial transactions. These transactions include purchases,
sales, receipts and payments. Once the bookkeeper has entered all the information in the accounting
system, that information is made available to the accountant. The accountant creates reports from the
transactions recorded by the bookkeeper. Common methods of bookkeeping are the single-entry
bookkeeping system and the double-entry bookkeeping system.
Single-entry bookkeeping records information only once and used in very simple applications such as
keeping a record of chequebook balances. It is used in very small, cash based businesses.
Double-entry bookkeeping records for every transaction has two entries in accounts. One account
will be receiving, e.g. goods and carries a debit entry, while one account will be paying out or
parting, e.g. bank and carries a credit entry.

Books of Prime Entry

These are books, or computer records in which certain types of transactions are first entered before
becoming part of the double-entry bookkeeping system, that is, entered in ledgers.
- The Journal is a book used to record items that are less common and not recorded in any other
book of original entry
- The Sales Journal (sales day book) is used for listing sales invoices and the data they contain.
- The Purchase Journal (purchases day book) contains details of purchase invoices received from
suppliers
- The Purchases Returns Journal (returns outwards book) is used to record items returned to
suppliers for which a debit note will be issues
- The Sales Returns Journal (return inwards book) is used to record and returns made by customers
for which a credit not will be issued
- The Cash Book is used to record cash and bank receipts (inwards) and payments (outwards). It
also provides a record of the business’ bank account and details of the amount of cash in hand.
- The Petty Cash Book is used to record the making of small (petty) payments, e.g. to purchase
fares, tea, coffee. These petty amounts are accounted for by petty cash vouchers.

Profit and Loss Account is prepared in order to determine the business’ net profit or loss. Net profit is
found be deducting indirect expenses from gross profit (total revenue minus the cost of
goods/services sold) and adding indirect gains.

The Balance Sheet is a statement of assets, liabilities and capital of an organisation at a particular
point in time (a kind of ‘snapshot’). It details the balance of income and expenditure over the
preceding period.
- Capital is money or capital items such as tools and equipment invested in a business.
- Assets are items the business owns. It is broken into fixed assets (items that remain in the
business beyond one accounting year, e.g. premises, motor vehicles and machinery) and current
assets (items that are constantly changing and leaves within one accounting year, e.g. cash,
stocks).
- Liabilities are things the business owes. It is broken into current/short-term liabilities (money
owing that must be repaid with one accounting year, e.g. good bought on credit for 30 days) and
long-term liabilities (money owing that can be repaid over a few years, e.g. mortgage).

Balance sheet equation:

Capital = Assets - Liabilities (C = A – L)
Assets = Liabilities + Capital (A = L + C)
Liabilities = Assets - Capital (L = A – C)

Cash Flow Statement/Statement of Cash Flow: is a financial statement that provides data regarding
all cash inflows a company receives from its ongoing operations and external investment sources, as
well as cash outflows that pay for business activities and investments during a given period.

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