Types of Securities and Their Viability in Accessing and Repayment of Loan to Start a Business - Literature review Example

FINANCIAL MARKETS, INSTITUTIONS AND MONEY Introduction When starting a business like sparkling wines, it is paramount to weigh access to finances which may be used to sustain and start the business. One of the options of financing such a business is getting loans through securities. This paper will examine various types of securities and their viability in accessing and repayment of loan to start a business. Types of securities Bonds Bonds are debt securities sold to the public mostly by central government, municipalities and companies. Investors buy the bonds for long term investments whereby they agree with the bond issuers the rates of interests as well as the exact time of payments. The bond issuer is referred to as the borrower whereas holder is regarded to as the lender (Kidwell, David &Whidbee 2007:66). The main advantages of the bonds are that they have fixed interest rates as well as fixed date of payments, further, they have security of payments and rarely do investors loss (Livingston1999: 24). The fixed rate of interest can either be released monthly or accumulative accessed after the end of the stipulated period. This interest is treated as a constant income and therefore it can be used to service debts. In this case an investor who has bought the bonds may use them as security to access the loans and use the interests as a way of servicing the loans before the business has thrived. Further, it is advantageous in that one can be able to plan for the finances because of constant factor. However the constant income may be disadvantageous on the round that they are affected negatively by inflation rates. Since they do not adjust, the re is possibility that in fluctuating markets the interests’ value faces grave uncertainties (Faerber 1999:8). On average they are very reliable when accessing loan from financial institutions and in this case they can apply when venturing in winery business. Shares As indicated by Thomas (2005: 105), generally, a share is a certificate which represents unit of ownership of a corporation, limited partnerships and mutual funds. Companies list their companies in stock exchange markets to raise funds by opening the ownership of the company to the public. Investors who buy these shares become part of the ownership of the company in respect to the percentage of the shares they own. Stocks hares can be used as securities to access financial loans from institutions. The owner of the share gets dividend after every financial year of the company and by the end of the years the company gives dividend. Another way that one can earn from the shares is by selling them at a higher value than the face value. The advantage of the shares in accessing financial assistance is that the financial institution has high levels of trust with the shares and the face value of the shares can be used to access the viability of repaying the loans (OECD 2005: 102). However, shares are affected by factors of inflation and market fluctuations. Shares can be very delicate when it comes to the fluctuations and the market value can either be above the face value or below the same (Dunn 2008:96). In this case the financial institutions must make all the considerable possibilities hence limiting the amount that one can access. In relation to the business of small winery, shares can be very effective however the amount that comes from the dividends cannot be relied on to repay the loans hence the business must in itself service the loans (Malhotra 2007:25). Equities This is the ownership that a person holds in a certain company. As indicated by Madura (2009: 123), the equity holder claims a share of the company and he bears the certificate to show the percentage of the claim he has in a certain company. The difference between the shares in stock exchange and equity is that the holder of the equity may not necessarily go through the stock exchange markets but has directly contributed to the company (Kidwell, David &Whidbee 2007:66). In this case he may use the share of the profit that is gotten in each and every month as a source of the security to acquire loans. The advantage of equity securities is that the company performance will determine how well one might be able to service the loans. The profits shares are treated as a constant income hence can be used to service the loan. However, sine the company is jointly owned the manipulation of the proceedings is minimal and in case of loss in any of the financial period culminates to a gap in repayment of the loan. On average equities have an upper hand in both long term and short term investment and therefore can be effectively be used of short term business like the winery business (Gomez 2007: 45). Debentures These are debt securities which are issued by big companies to secure loans from individuals. Debenture holders are regarded as lenders and the issuer is regarded as a borrower. Like the bonds they have fixed interests’ rates and a fixed date of payments however they are not as secure as bonds and hence regarded as insecure securities (Manson 2010: 112). In this respect in instance of bankruptcy the lender is not guaranteed with assets of the company hence treated as normal creditors. In this case of a small winery spirits the investor can rely on the interests which accumulate after fixed time whereby they might be used to service the loans. Therefore, like bonds they can be relied on for both long term investments and short term investments. The trust between the financial institutions and the holders of the debentures is not as good as for that one of the bonds because of its insecure nature (Goyal 1998:6). On the good side however they have higher rates of interests than the bonds and therefore they can access higher financial capital as compared to the bonds. Promissory notes These are securities issued by companies whereby they borrow money from individuals promising to pay at a fixed rate of interest in a stipulated time. Just like the bonds and the debentures they are unveiled by the companies to raise funds from individuals thereby borrowing from the public. They have the advantage of fixed rate of interest as well as fixed payment period. However the promissory notes are very fragile and the financial institutions must first verify the audacity and authenticity of the notes. Therefore when accessing financial help from the finances the risk is a little bit more higher than either in bonds or debentures. It is paramount to take risks which are manageable and in this situation promissory note have limited jurisdiction. The companies which can be trusted with this kind of securities are limited and therefore one stands a higher risk to invest in these securities. Unlike the bonds and debentures they cannot be transferred to stock markets and hence one might be charged higher interest rates by the financial institutions (Das 1996: 122). Options This is a formal contract between two parties which concerns either selling or buying of a property. It bestows an investor upon the rights to purchase either a bond, stock or any other kind of property within a stipulated time (William & Alan 2009:187). The property however becomes under the full control of the buyer after they have completed to pay the amount. An investor who has attained an option can use it as a security to obtain finances from financial institutions. In case of defrauding to honor the payments the institution will then take the responsibility and pay the amount lest acquiring the assets on your behalf. On the other hand the institution may pay the whole amount of the value and then hold it as a security. This option is by far better than taking a normal loan from financial institutions because incase of not been able to service it the institution will acquire the property on the behalf of the buyer to recover the amount. It is a loan agreement that one stands at an almost zero risk of losing. However it has the disadvantage of the financial institution not willing to risk investing in such ventures. Hence it might be difficult to convince the financial institutions to accept to loan in such circumstances however if it goes through it might be the best (Madura 2008:5) The most viable options Bonds and equities are the most viable option when starting a sparkling wines business. Wines business is influenced by various fundamentals and in this case business persons must look into the following. Getting the distributor, the alcohol license, building strong relationships and the location of the business. The kind of capital that is required in this short term plan is huge and the only way that the lenders can accept giving loans pegging on the securities is through safe payment procedures (Madura 2008:5). Equity has a constant flow of income as well as the bonds which stands a better chance of acquiring the loan. Repayment of the loans It would be easier to pay the loans through the monthly interests gotten from the bonds and the parts of the profits from gotten from the equity shares. In case the equities do not have the capacity to repay the loans use some of the profits acquired from the business. Reference list Cohen, M, Malburg, C and Forbes, S ( 2009) Making Money in the New Fixed Income Landscape. 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