How Does Business Work

一． Loan Capital VS Share Capital (where does money come from) Generally speaking, money that a company raises can be divided into two headings: Loan Capital: Banks, Governments, Bonds, Building society Share Capital: Friends and Relations, Your own savings. Loan capital 1. Banks Banks are in business to provide a market place and the product they deal in is money. Namely, banks provide a link between those who have spare money in invest, and those who wish to borrow it. What do the banks get out of it? Let’s answer it by making up some figures. For example: If Mr. Liang has spare money &100, he put the money into the banks, in turn, banks promise to pay him interest at 10% per annum. Meantime, Mr. Liang decide to run a business, he ask bank to lend he &100. The rate of interest he argues to pay them is 15% per annum. Hence, Income is &15, Expenditure is &10, Profit is &5. Fixed rate: bank quote you a straight forward rate Floating rate: bank quote you x% above base or LIBOR It is depend on you to choose a rate. Gambling. Different risk have different rate. More risk, higher rate. Security: the bank will ask for some security for the money it is lending you. A part of business assets, lands. For the smaller, newer businesses, private house. Investment banks trade in financial securities, such as derivatives. 2. Bonds When a company is established, it can be raise money by issuing its own paper, a corporate bond. Bonds can be tradable. For example: 卖 bond paying 10%，reinvest 11%. Share Capital Before we get into the technical details of share capital, let’s look an example. Buy house Bank loan, Your Own Money, value of house. Sales, repay the mortgage, surplus on sale, amount you originally risked, profit.

The main different between loan capital and the share capital is what the lenders want out of it. Loan capital wants their interest payments and their money back. Share capital gets everything that is left or loss all of their money. The providers of loan