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economic theory

            A small company will have to ensure its capability of all three in spite of the fact that in comparison to a larger company, it will be paying a higher interest rate, will be risking security based on the owner's personal assets rather than company assets and repayment terms will probably be more rigid rather than flexible as banks rightly see the small company borrower as a higher risk. (This is explained later on when discussing the problems faced by the small company in raising finance.).
             There are sources of loans other than from banks. Companies usually resort to these financial institutions as a last resort because their interest payments are fixed and if inflation falls, this will make the borrowing very expensive. These financial sources can include pension funds, insurance companies, merchant banks, the European Investment Bank and the ICFC. (Investment and Commercial Finance Corp[oration).
             There is also the "medium term note" open as an alternative which is a promisory note issued by the company promising to pay a specified amount on a specified date. The procedure is for the company to write the note and then to sell it in the market place. The interest rate can be fixed or may fluctuate and the maturity date of the note can be anything from under one year to as long as fifteen years.
             The small company may issue a debenture, which is a document issued in return for money lent. There are various types of debentures but they all have some features in common. They are usually in the form of a bond, undertaking the repayment of a loan on a specified date and with regular stated payments of interest between the date of issue and the date of maturity. These dividends have priority to be paid before any other dividend is paid to any other class of shareholder. The Companies Acts define the word "debenture" as including debenture stock and bonds. Often the terms debenture and bond or loan stock are interchangeable although I shall mention Bond and Loan Stock a little later on.

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