Financial Guide for SMEs - SME Corporation Malaysia

Financial Guide for SMEsDebt, Equity or Internal Funds?All businesses need finance to start operations and to grow. Finance can beobtained from the following sources:• Debt – this is fi nancing sourcedexternally, such as from banks.• Equity – this is fi nancing sourcedinternally, such as from an owner orinvestor.• Internal Funds – whereby profi ts andcash generated by the business areused to fund the ongoing operationsand expansion of the business.Comparing Debt Finance,Equity Investment and InternalFundsA key requirement toensure that you choosethe right funding is tomake certain that youfully understand thedifferences betweendebt and equity,and to consider theimplications of each onyour businessMany SMEs are faced with the dilemma to determine which type of funding isthe right option for them. The majority of SMEs look to raise debt fi nance orobtain funding support from a family member in order to expand. This is becauseit is often difficult to get an external investor interested in taking the risk of astart-up or SME business. Debt fi nance or using existing funds also enablesthe owner to maintain control over their business rather than having to give apercentage of ownership to an investor.Internally generated equity is the original funding provided by the owner and mayalso include any profi ts from the sale of an asset owned by the business orfunds generated through business trading each year that have not been drawn out(through dividends or drawings) by the owner. It could also be any additional equityfunds contributed by the owner.81chapter 7-13 p79-181 Eng.indd 818/15/11 5:02:53 PM