What kind of financing does a company need? There are 2 types of expenditure that a company incurs to start and run its business:
1. Capital expenditure to fund capital goods such as plant and machinery used to produce goods and services; and
2. Operating expenses to fund daily operations e.g. salaries, utilities and rent.
For capital expenditure (capex), the company uses term financing which has a fixed repayment period, usually less than 7 years. This term loan or term financing (in Islamic) typically has a grace period where it does not have to repay any part of the loan. Financiers recognise that the company needs time to be established and generate cash. However, there is no grace period for interest payment.
Operating expenses are funded by working capital financing which are in the form of revolving credit (RC), overdraft facility (OD) or trade lines such as letter of credit (LC), bankers’ acceptance (BA) and trust receipts (TR). These are short term in nature (1 year and subject to renewal). RC and OD allow you to use, pay back and reuse within the tenure of the facility.