Medium Term Sources of finance
Loans from Merchant Banks and Discount Houses
Rather than obtain overdraft for capital develoments, many firms have
now moved towards obtaining a loan from one of the secondary banks
discount houses or merchant banks.
This is a convenient source of medium term credit used particularly for purchase of plant and equipment. Initially, a hire purchase company purchases the required equipment but it can immediately be used by the hirer who after a series of regular payments which includes interest
charge becomes the owner of the equipment. The hirer has the advantage of the use of the equipment over the period he is making the payment and so obtains the benefits from using the equipment without having to incur a large capital outlay.
The significance of hire purchase in the financial structure of the economy is that it is a convenient source of medium term credit on fixed terms for the purchase of equipment, where the equipment itself can provide adequate security for the loan and the loan can be paid off by regular instalments.
The security on any loan is important for the equipment itself. To provide the security, the life of the asset must be greater than the period of the agreement, so that if the agreement is broken, there is still an asset in existence which has a value.
Leasing is usually a cheaper form of financing than hire purchase. One
major difference is that at the end of the leasing period, the equipment does not automatically belong to the company that has been making the payments.
This is a credit made available to a company by a syndicate of banks and
institutions. The banks and institutions may consist of a clearing bank for organising the credit and for dividing the risks between the parties and a number of merchant banks, one of whom takes the responsibility for organising the credit and for dividing the risk between the parties concerned in some negotiable proportion.
From the company's point of view, these acceptance credits are similar in nature to a medium term overdraft with either a fixed or a variable rate of interest. The syndicate agrees to make available to the company a certain level of credit. The company can then use these funds as it requires them up to the agreed maximum. The length of period of credit is in the region of 5 years.
Loans from Industrial Development Bank:
The Nigerian Industrial Development Bank supplies fixed assets and capital to Industries ranging from N5,000.00 upwards. The bank assists Industries by means of loans, debentures and shares. The loans are medium term in nature and are repayable within a reasonable period at fixed rate of interest charged on the balance of the loan.
The Euro Currency Market provides varying terms of funds for industries. The market for many years has largely been a market for dollars and Deutschmarks.
The funds in the market come from:
(a) The Central Bank reserves of various countries. As a country builds up a trade surplus with other countries, particularly with USA, part of the growing reserves are in dollars.
(b) Commercial investors the high interest rates that have been offered on occasions for Euro dollar deposits, have attracted investors in Europe who have dollars available.
(c) Companies and commercial banks in the United States of America have at times had dollars available outside the USA and have found it more profitable to invest this money in the Euro-market rather than retrieve it to the USA.
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