Buy & Use of Funds
How much to borrow? How to allocate the costly funds etc? Are questions that demand efficient solutions from businessmen? The business environment comprises companies that have just started up or are in various stages of their development. Each has its own reason for being in business and each has its own finance requirements.
A company requires financing to carry out its business plan. There are two main sources of business financing: through equity investors (owners or shareholders) and creditors (also called lenders). Financial markets are potential sources of business financing. While looking to financial markets, a company considers several issues including: the amount of financing necessary, source(s) of financing (owners or financial institutions), timing of repayment and structure of the financing agreement(s).
Borrowing from banks/financial institutions is different than equity financing in an agreement, or contract, is usually established requiring repayment of the loan with interest at a specific date(s). While interest is not always expressly stated in these contracts, it is always implicit.
Getting the right banking partner is the success of all business units which may support the growth cycle with solutions that meet all their financial needs in time. There are various types of bank facilities available in the market. Interest rate and the Facility amount depend on the length of the company’s business, the industry of the client, historical performance, future plans, management profiles and the market reputation. Banks are taking initiative to understand the company’s business strategy and needs in order to design a tailored solution to match with the client’s requirements by reducing the risk and the interest burden.
Loan periods are variable and depend on the desires of both lenders and management of the companies. It may vary from short term (say, couple of months to one or two years) to long term (say, 3/5/10 years etc).
Like owners, the financiers are concerned with return and risk. From shareholders point of view one has to bear in mind always that the cost of funds is always less than the return anticipated while going for borrowing. Otherwise owners will be spending from their own pocket instead of taking money to their pockets.
A company’s capacity to borrow depends on several factors and is subject to change. It depends on profitability, stability, size, industry position, asset composition and capital structure. It also depends on credit market conditions and trends. Owners through proper finance team/personnel have to manage the borrowed fund effectively to ensure efficient utilization of the same.
Managing Corporate Finance
The finance director of a business has the responsibility for managing the financial resources of the business to meet the objectives of the business.
The finance director’s responsibilities involve:
What level of investments/ assets/ financing should the company have ?
The management of the company has various choices, selecting the best choice is highly important to get funds at cheaper rate for certain purposes / assets. Sometimes we noted that some companies are using wrong mixtures, for instance, when asset finance are available from banks for interest (flat rate) at 5 % to 7% per annum normally, companies are taking business loan/term loans at very high interest for acquiring assets which costs 8% to 13% per annum.
Different types of Financing options available in UAE
Working Capital and Trade Finance
The modes and various parameters by which the banks in UAE generally lending short term loans or facilities are tabulated below for ease of reference.
Director - Emirates Chartered Accountants Group