One of the major problems facing any business enterprise is that of obtaining finance. This is a problem not merely of quantity but also of
type. The situation is further compounded by legislation. a the dynamism of the economy, but fundamentally by the requirement to minimize costs.
The construction industry comprises a wide variety of firms from the single person enterprise to the large multinational public company. The sources of capital available to any firm are quite numerous but public companies have the great variety of sources available for their use and the single person enterprise, the least variety.
Construction loans can be classified into short term
and long term borrowings.
It is that capital required
for five to ten years, either to start a business or to carry out expansion programs. Broadly the capital is used to purchase buildings, plant and
equipment. The risks to the lender are high because of the time scale involved, consequently only established firms are generally considered by the lending institutions.
The firm when established often needs short term capital to overcome immediate cash flow problems.
Materials have to be purchased, plant hired, labor and sub-contractors paid and so on before payment is received from the Employer.
Shares may be of several types, each
with different rights. Ordinary shares which are called equity of the company represent the major ownership and risk bearing element of the
entrepreneurship. The shareholder is entitles to the residual profits in the
company after all other commitments have been met. Ordinary shares usually
entitle the holder to voting rights. Preference shares are also common, entitling the shareholder to a dividend up to a prescribed level prior to
any distributions being made to holder of ordinary shares. Cumulative preference shares are less common and carry a right for any unpaid to be
carried forward for payment out of the profits of future trading periods. A new issue of shares for sale raise capital for the company
These are loans made to the
company. They differ from conventional loans insofar as they are offered to
the market at a fixed interest rate and are repayable at a set time. The loan is either secured by mortgage on the firm's property or simply on the
basis of the firm's reputation. Debenture holders rank ahead of almost any other creditors in the case of liquidation of the firm's assets. Like other
loans, Debentures represent a cost to the company and as such the interest payment made is deducted from profits before allowance is made for tax
income. In addition, the payments rank ahead of any dividend declared to shareholders.
Loans are not easy to obtain. Most
institutions are reluctant to lend long term, particularly to construction firms. They often request the borrower to provide a proportion of the
finance from internal resources. Merchant banks tend to demand higher rate of interest than the clearing banks since they are normally dealing with a
Retained earnings is profit retained within the firm instead of being distributed to the owners
A bank overdraft is a process
whereby a customer of a commercial bank is permitted to overdraw on that account up to an agreed limit for a prescribed period. This is rather
similar to a bank loan except that interest is payable for the amount overdrawn only for the period it remains overdrawn and the account is
usually repayable on demand or upon the termination of the overdraft period.
Delayed payments to creditors and prompt ones from debtors, if handled with care, ease cash flow problems. The construction industry is well suited for this sort of financial arrangement since completed work is paid for by the client in periodical stages. CFF3 Cash Flow Forecasting software is a unique construction loan estimating software for estimating the difference between cash in and cash out amounts for construction projects, and hence you can realize the construction loan or external finance required for completion of the project.
Short term loans
are available from individuals, banks, and other financial institutions.
They are required for the provision of working capital, carry a prescribed
rate of interest upon the entire sum and can not be recalled prior to the
due date. Usually short term loan are obtained from commercial banks
Payment of this tax is usually made one year in arrears. The cash therefore
remains in the business during that time and acts as a valuable source of short
Depreciation is a bookkeeping and
costing exercise by which the initial cost of an asset is written off over its useful life. It can be regarded as a source of capital. If no depreciation was charged on, say equipments, a great amount of profit would
be available for distribution to the owners. Thus, reserves created by the process of depreciating fixed assets represent a stake in the firm by the
owners, in a similar manner to retained earnings. For purposes of corporation tax, the method to be used for depreciating any asset is
prescribed in the tax regulations and so it may be necessary to produce two accounts, one for internal purposes and the other for taxation purposes
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