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SOURCES OF FINANCING
Prepared by: Noor Hasniza Haron

PREPARED BY: NUR HAYATI BINTI AB

SAMAD
FACULTY OF ACCOUNTANCY
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LONG-TERM FINANCING

LONG-
TERM
FINANCING

EQUITY DEBT

Ordinary Preference Hire Government

Warrant Debentures Lease
shares shares Purchase Assistance
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GOVERNMENT ASSISTANCE
Government assistance is the action by the
government designed to provide economic
benefits to a specific entity or range of entities
qualifying under certain criteria free technical
assistance, provision of guarantees.

Government assistance :
Government grants
Government loans
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GOVERNMENT GRANTS
A government grant is assistance from the government in
the form of transfers of resources to an entity in return for
past or future compliance with certain conditions relating
to its present activities

Can be divided into two levels:

Pre-seed ( Idea in mind and not knowing what to do)
Seed
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GOVERNMENT GRANTS
Two programmes under the level pre-seed:

Cradle Investment Programme (CIP)

Multimedia Development Corporation (MDeC)

Three programmes under the level seed:

Cradle Investment Programme (CIP)

Enterprise Innovation Fund (EIF)
Commercialisation Grants-Seed Funds
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GOVERNMENT LOANS
7 types of government loans open for application:

1. Graduate Entrepreneur Fund

2. Young Entrepreneurs Fund
3. Shariah-compliant SME Financing Scheme
4. Fund for Small and Medium Industries 2
5. Green Technology Financing Scheme (GTFS)
6. Halal Industry Fund
7. Intellectual Property Financing Fund
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GRADUATE ENTREPRENEUR FUND

Objective
To encourage graduates to participate and venture into businesses in the selected industry.
Maximum financing rate : 4% per annum
Maximum tenure : 7 years
Minimum financing : RM20,000
Maximum financing : RM250,00 or up to 100% of the project cost
Participating financial institutions / Implementing Ministry / Agency
SME Bank

Eligibility criteria
Graduate holds majority equity in a company registered with the Companies Commission of Malaysia under the Companies Act
1965
Has a diploma/degree/doctorate qualification
Must be below 40 years old and has successfully completed training programmes, placement and practical training under the
Ministry of Entrepreneur and Co-operative Development (MECD) or its agencies

Purpose of financing
Working capital
Financing fixed assets or both

Eligible sector / Types of financing

Transport
Tourism
Selected services
Franchise business
Special programme under MECD

Application procedure
Application to be submitted to SME Bank via MECD
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RAISING LONG TERM FINANCE ISSUE OF

SHARES AND DEBENTURES
Company may issue shares/debentures for cash consideration to
acquire fixed asset/other company/ just to raise cash.
This can be done through issuing houses :

(Malaysia Industrial Development and Finance Consultant and Corporate Service

Sdn Bhd (MIDFCCS) subsidiary to MIDF)
Malaysian Issuing House

Function of issuing house undertake and provide share issuance

facilities for Initial Public Offerings (IPOs) and consultancy services
Securities Commission is responsible to regulate all matters relating
to securities and act as a market watchdog
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RAISING LONG TERM FINANCE ISSUE OF

SHARES AND DEBENTURES
Steps of issuing shares:

STEP 1 : Company seeking listing submit application to Securities Commission

STEP 2: Circulate prospectus to the public
STEP 3: Minimum amount of subscription must be received as per the
Company Act 1965 before the company can proceed with any allotment of
shares.
STEP 4: If not met, underwriters (investment banks) such as Maybank
Investment bank will underwrite the issues.

Underwriting is the process by which investment bankers raise investment

capital from investors on behalf of corporations and governments that are
issuing either equity or debt securities
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RIGHT ISSUE
Invitation to an existing shareholders to purchase
additional shares in the company at reduced price which
is known as subscription price.
Right certificates will be issued to them to indicate the
specific number at the specific price.

Alternatives available to the shareholders are:-

To subscribe the shares
To sell the rights to third parties
To ignore the rights
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RIGHT ISSUE

Example:
MAS makes an offer of right issues to its existing shareholders at the
rate of one right issues for every two shares held at a price of RM2.50
(market price of RM3.50). The par value of share is RM1. A holder of
10,000 take up the rights.

Calculate number of right issues eligilble and the price that they have
to pay

Answer : (10,000/2 = 5000 right issues).

Total payment = RM2.50 x 5000 = RM12500
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BONUS SHARES/SCRIP ISSUE

Shares issue by the company to its existing shareholders free of charge.

Normally recommended when the company has large accumulated

profit/capital reserves (such as share premium reserves) but unable to
distribute in the form of cash dividends due to regulation or company policy.

Also known as capitalization of reserves. Usually made in the proportion of

shareholdings.

For example, a three-for-two bonus issue entitles each shareholder three

shares for every two they hold before the issue. A shareholder with 1,000
shares receives 1,500 bonus shares (1000 x 3 / 2 = 1500).

Company working capital wont be affected as there is no cash outflows.

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OFFER FOR SALE

There are two main ways for a company to list new shares

1) By an offer for sale, which is a public invitation by a sponsoring intermediary such

as an investment bank.

2) By an offer for subscription, or direct offer, which is a public invitation by the

issuing company itself.

The offer can be made by inviting subscriptions from investors.

(a) Offer for sale by fixed price - the sponsor fixes the share price prior to the offer.

(b) Offer for sale by tender - investors state the price they are prepared/willing to
pay.

A strike price is established by the sponsors after receiving all the bids. All investors
pay the strike price.
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PUBLIC ISSUE AND PLACING

A public seeking listing on the Bursa Malaysia is allowed to issue and list any
securities as part of its listing scheme including preference share, options,
convertible securities to the public

However, the most common issue is ordinary shares. Usually shares offer in
the public in denomination of one thousand shares per lot

The shares of a public issue may be allocated as follows:-

To eligible employees, including distributors, dealers
Private palcement (institutional shareholders)
The public

The issue could be oversubscribed/undersubscribed.Minimum subscription

must be received or if oversubscribed, the applicants will be selected by
means of balloting
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PRIVATE FINANCE INITIATIVE (PFI)

The Private Finance Initiatives (PFI) Programme was announced in the Ninth
Malaysia Plan in March 2006, aimed at facilitating greater participation of the
private sector to improve the delivery of infrastructure facilities and public
service.

It sets out many of the key principles on how some of the public sector
infrastructure projects will be procured and implemented. PFI will be
undertaken as part of the new modes of procurement under the Public Private
Partnerships (PPP) to further enhance private sector participation in
economic development.

Involves the transfer to the private sector the responsibility to finance and
manage a package of capital investment and services including the
construction, management, maintenance, refurbishment and replacement of
public sector assets such as buildings, infrastructure, equipment and other
facilities, which creates a standalone business.
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CONCEPTUAL FRAMEWORK - PFI

There is a contract for the private party to deliver public infrastructure-
based services over a long period of time.

The private party will raise its own funds to finance the whole or part
of the assets that will deliver the services based on agreed
performances.

The public sector, in turn, will compensate the private party for these
services.

In some PFI projects, part of the payments may flow from the public
users directly.
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KEY FEATURES/CHARACTERISTICS
Relationship between public and private sectors is based on
partnership

Public sector procures specified outputs or outcomes of a service

for a concession period

Private sector determines the required inputs to achieve the

specified output and the private sector is given latitude to introduce
innovation into their designs and development to reduce overall
costs

Payment for services is based on pre-determined standards and

performance
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KEY FEATURES/CHARACTERISTICS
Maintenance culture is fostered where the concessionaires will be
responsible for the long-term maintenance of the assets throughout
the operational tenure agreed upon

Integration of design, construction, finance, maintenance and

operation total package

Transfer of assets at the end of the concession period becomes an

option to the Government

Optimal sharing of risks whereby risk is allocated to the party who

is best able to manage it;
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SHORT-TERM FINANCING

SHORT-
TERM
FINANCING

INTERNAL EXTERNAL

Owners Retained Sales of Debt Short-term Bank

Trade credit
investment profit stock/assets factoring loan overdraft
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WHY SHORT TERM FINANCING?

Cash flow from operations may not be sufficient to keep up with
growth-related financing needs.

Firms may prefer to borrow now for their inventory or other short term
asset needs rather than wait until they have sufficient fund.

Firms prefer short-term financing instead of long-term sources of

financing due to:
easier availability
usually has lower cost
matches need for short term assets, like inventory
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OWNERS INVESTMENT
This is money which comes from the owner/s own
savings

It may be in the form of start up capital that is used when

the business is setting up

It may be in the form of additional capital perhaps used

for expansion

No interest is payable

There is a limit to the amount an owner can invest

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RETAINED PROFITS
Net income remaining after paying dividend to the shareholders or drawings
by the owners of the capital

SALES OF STOCK/ASSETS

Quick way of raising finance because by selling off stock it reduces the costs
associated with holding them

Businesses do not always have surplus non current assets which they can
sell off

There is also a limit to the number of non current assets a firm can sell
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DEBT COLLECTION
A business can raise finance by collecting the money
owed to them (debts) from their debtors

Not all businesses have debtors ie those who deal only in

cash

No additional cost in getting this finance since it is part of

the businesses normal operations

There is a risk that debts owed can go bad and not be

repaid
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SHORT TERM LOAN

This is money borrowed at an agreed rate of interest over
a set period of time

Set repayments are spread over a period of time which is

good for budgeting plan

Can be expensive due to interest payments

Bank may require security on the loan

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ESTIMATION OF COST OF SHORT-TERM CREDIT

Calculation is easiest if the loan is for a one year period:

Effective Interest Rate is used to determine the cost of the credit

Effective Cost (interest + fees)

Interest Rate = Amount you get to use

Example : You borrow RM 15,000 from a bank, at a stated rate of 9%, and
must pay RM1,350 interest at the end of the year. Your effective rate is the
same as the stated rate: RM1,350/RM 15,000 = 0.09 = 9%
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BANK OVERDRAFT
This is where the business is allowed to be overdrawn on
its account

This is a good way to cover the period between money

going out of and coming into a business

If used in the short-term it is usually cheaper than a bank

loan

Interest is repayable on the amount overdrawn and it can

be expensive if used over a longer period of time
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TRADE CREDIT
Trade credit is summed up by the phrase: buy now pay
later

Typical trade credit period is 30 days

No interest charged if money is paid within agreed time

Trade credit discount will be given normally for the cash

payment

Businesses need to carefully manage their cash flow to

ensure they will have money available when the debt is due
to be paid
 CHAPTERS TUTORIAL
1. Refer to past year question:

Dec 2016 (Q2 b, c & d)

June 2016 (Q2 a)
Dec 2015 (Q2 b , c & d)
June 2014 (Q 2 a & d)

Its not that Im so smart, its just that I stay with problems longer.
~ Albert Einstein