By definition, money is a commodity and its value goes up and down. It was developed to combat the inability to trade unlike skill sets or goods in barter. How much would you pay for money?
Everyone uses money. We all want it, work for it and think about it. While the creation and growth of money seems somewhat intangible, money is the way we get the things we need and desire. The task of defining what money is, where it comes from and what it’s worth belongs to those who dedicate themselves to the discipline of economics.
If the Central Bank wants to increase the amount of money in circulation, it can simply print it, but the physical bills are only a small part of the money supply. Another way for the central bank to increase the money supply is to buy government fixed-income securities in the market. When the central bank buys these government securities, it puts money into the marketplace, and effectively into the hands of the public. How does a central bank such as the Federal Reserve pay for this? As strange as it sounds, they simply create the money out of thin air and transfer it to those people selling the securities! Or, it can lower interest rates, allowing banks to extend low-cost loans or credit – a phenomenon known as cheap money – and encouraging businesses and individuals to borrow and spend.
To shrink the money supply, the central bank does the opposite and sells government securities. The money with which the buyer pays the central bank is essentially taken out of circulation. Keep in mind that we are generalizing in this example to keep things simple.
The cost of money refers to the average interest rate at which you are able to borrow money. Think of the cost of money as the rent you have to pay for using someone else’s money.
There are corporate clients who need project funding, but sadly do not understand how the funding process works. This lack of understanding is the predominate reason why many project funding requests are declined.
Prior to the global meltdown, most project funding was granted on the merits of the project and not so much on the principals. Today, due diligence demands a complete check of the principals seeking the funding more so than the project itself.
Borrowers needs to accept that money is a commodity. In other words money is something that you buy. How much does money cost? This is a question for an institution investing in your business.
The time value of money is the cost of money and is measured by the interest due over the loan period, although the interest is expressed as an annual rate, the period is actually a month.
Corporate clients seeking project funding have a number of options to acquire money, but borrowers who think that someone, somewhere, is going to hand over millions without advance costs, is unrealistic and they are rarely if ever funded.
Don’t expect any funding source to work for two or three months on your behalf for nothing. Suppose you needed $20 million. The funder, after three months of hard work, makes an offer, and for whatever reason, you decline. The funder has worked for three months for nothing. If you think that’s going to happen, think again.
When you need money, be prepared to pay for it.
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