Time finance
If you want to make good use of your time, youve got to know whats most important and then give it all youve got. The same applies for your business also. Usually, many people take personal finance loans to fulfil their requirements and when it comes to their business needs, they think hundred times resulting in a loss of opportunity. They feel that business needs can be attended as and when their contracts are paid and in this run, lose the most important factor of production i.e. time. Time in todays competitive world has got a lot of significance and people who realise this significance are destined to become successful.
For example if Mr X. and Mr. Y were dealing in the same business. Mr. X who was more organised may plan to buy some machinery useful to his business, by taking up a loan while Mr. Y may wait for receiving certain payments from his creditors to finance the machinery. But, by the time Mr. Y accumulates his amount and purchases the required machinery, there is every possibility that Mr. X must have already purchased it and his output is already released into the market and he is reaping huge benefits just because of the minute risk taken by him ahead of Mr. Y. Further, there is every possibility that the consumers of Mr. X may like his products and even though Mr. Y releases the same quality of the product, there may be no takers for it. In this way, Mr. Y would lose his business and profits for just that meagre 5% interest or so, which the banks charge on loans.
This Interest payment is a privilege enjoyed by the banks and other lenders - a consideration for their effort of depriving themselves from enjoying the benefits of holding cash. The loan taker who enjoys the benefit of the moneys purchasing power is expected to repay this consideration along with the loan taken up by him. Along with this consideration, he also needs to reimburse the lender for the loss of purchasing power of money over the period of time for which the loan was taken up. Loss of purchasing power of money occurs due to inflation.
1. The amount of the loan to be taken up and the interest to be paid up on that amount thereby discounted to the present value.
2. The amount needed for the investment and the expected cash flows from such investment, discounted to the present value.
If the investment returns exceed the calculations of the loan repayments, then the investment is viable and vice versa. This is called time value of money and plays a very important role mainly in the options, futures markets, bills of exchanges which the bankers discount and the bonds.Usually, finance for the small businessmen is usually through discounted bills of exchange. It so happens, that businessmen extend credit to their creditors for a certain period of time through bills of exchange. These bills of exchange could be payable after a certain period of time. But, if the concerned businessman is in urgent need of money, he transfers these bills in the name of the bankers at a certain discount rate. This discount rate is the consideration for the banker for holding the bill till the time of the maturity and when the time comes, the banker is sure of getting back the whole amount of money.
The amount of discount is calculated according to the time of the maturity of the bill and in other way, it is like the banker is extending a loan to the businessmen on the basis of a collateral security.
There are different types of secured loans extended by the bankers to the businessmen:
Call Money
Fortnight bills
1 Month bills
3 Month bills
Longer period loans Business loans for small investments are taken on the basis of security for a very short period of time.
Call Money:
Here, bills are exchanged for loans for a period as short as a week or so. There is one more clause that the bills need not be held till the time of maturity and when the banker is need of the money, he can ask for repayment immediately. As the period of loan is very small and not fixed, naturally, the interest rates are very meagre and these are usually taken up by people who are sure to arrange their finances within a day or so. These loans are only taken to make use of an opportunity, which seldom comes.
Fortnight bills: The maturity period of these bills is 15 days and they are costlier than the Call Money loans.
The 1 Month bills and 3 Month bills are also discounted on the same lines excepting for the change in their maturity periods.
Longer period loans on the other hand may prove to be costly as they involve longer time value and as such are entered only after a perfect analysis of the risk and return expectations.
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