The term “Financing” pertains to the action of providing or obtaining money to pay for desired purposes. The provider is called a “financier” while the recipient can be a beneficiary or borrower. We will focus on the financier-borrower relationship.
Financiers provide money to borrowers in consideration for receiving interest income; financiers require borrowers to pay service fees and to maintain a certain level of daily balance in saving or savings-checking accounts in the bank. Borrowers obtain money from financiers usually: to augment starting capital, or to expand operations of a growing product line, or to replenish operating capital tied up to uncollected receivables.
The proponents of new income-producing activities are expected to be able to pay for the preparatory financial requirements of the activities. Financiers- banks, quasi-lending institutions, loan sharks- provide loans to start-ups. Due to perceived high degree of uncertainty in the capacity of start-ups to repay loans, financiers usually increase interest rates by charging higher service and incidental fees, require higher daily balance requirements on savings account and ask for more securities. Borrowers who fail to satisfy bank requirements usually become victims of loan sharks.
Borrowers who obtain loans to expand existing product lines are subjected to lesser loan requirements because they are perceived as more likely able to repay loans. Borrowers who urgently need to replace operating funds tied up in uncollected receivables are also treated leniently by banks because these are often medium to large scale business establishments with relatively sound track records.
Regardless of the size of a business establishment, its stability is measured by its capability to remain as a regular and earning player in the market and it has fixed and cash assets to guarantee that it can continue to exist. Finance management is one key in maintaining business stability. One good finance management practice is making sure that a company maintains a stand-by credit line that it can avail from on short notice; this guarantees that transactions requiring cash would always be supported. This is called liquidity.
Certain universal banks offer “call loans”; this financing scheme responds to the need of businesses that require short term loans on short notice. This scheme discourages the proliferation of large-scale loan sharking activities.