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					Sources of Finance

Classification based on Time Duration

Sources of Finance

Classes

Short Term Loans

Meddle Term Sources

Long Term Loans

Example

Trade Credit, Working capital, Public deposits, Advance from dealers

Medium Term Loans, Fixed deposits raised from public

Shares, Debentures, Term Loans, Leasing, Right issues, Venture Capital etc.

Classification based on Ownership

Sources of Finance

Classes

Owned

Borrowed

Example

Share Capital , Retained Earnings

Debenture, Long Term Loans

Classification based on Source of Generation

Sources of Finance

Classes

Internal Source

External source

Examples

Retained Profits, Depreciation

Share Capital, Term Loans, Commercial Papers, Public Deposits

Shares -As Source of Finance
 Share :


Share in share capital

 Shareholder:
Member of Company (agrees in writing)  Subscriber to memorandum


 Equity share:
Risk bearing Capital  Long term, Owned, External


Concepts:
 Share  Authorized capital  Issued and Un-Issued capital

 Subscribed capital
 Called up Capital and Uncalled Capital

 Reserve Capital

Concepts (cntd…)
 Paid up Share Capital  Calls-in Arrears  Market Value  Par Value

 Share buy back

For Issuing Company
Advantages
 Permanent source of capital

Disadvantages

 High cost  Over capitalization leads

 Paying dividend not

compulsory credit

 Signifies ability to obtain

to loss on opportunity of trading on equity
 Dilute ownership and

 No charge on assets of

company due to issue of shares

control

For Shareholders
Advantages Disadvantages

 Benefit of attractive

 Risk capital  Control over management

dividend and bonus shares
 Can exercise control over

is manipulated
 Fluctuation in stock market

company
 Limited liability

prices is threat

Share Capital

• These are the part of share capital of the company • It is typically a higher ranking stock than voting shares • Issue of shares by listed companies to a select group of persons •This is a faster way for a company to raise capital

Equity shareholders and Preferential Shareholders
 Equity Shareholders are supposed to be the owners

of the company  They have right to get dividend, as declared, and a right to vote in the Annual General Meeting for passing any resolution  Equity Shares are traded in secondary market
• Preference Shares, – Cannot be traded, unlike equity shares – Are redeemed after a pre-decided period • Preferential Shareholders do not have voting rights

Preference Shares
Preferential Shares
Cumulative & Non Cumulative Participating & Non Participating Redeemable & Non Redeemable Convertible & Non Convertible

 Preferential shareholders

enjoys preferential right to:
of dividend at a fixed rate during the life time of the Company Dividend rights are often cumulative  The return of capital on winding up of the Company
 Payment

DEBENTURE

WHAT IS DEBENTURE
 A LONG TERM DEBT INSTRUMENT
 A VIABLE ALTERNATIVE TO TERM LOAN  OBLIGATION OF A COMPANY TOWARDS ITS DEBENTURE
HOLDERS

 FLEXIBILITY  IN CASE OF BANKRUPTCY DEBENTURE HOLDER PAID BY
THE REMAINING ASSETS

 FREE ASSETS

FEATURES:
 PRESENCE OF TRUSTEE  SECURITY  INTEREST RATE  CONVERTIBILITY

TYPES OF DEBENTURE

TYPES OF DEBENTURES

Redeemable Or Irredeemable

Convertible Or Non - Convertible

Secured Or Unsecured

Bearer or Registered

ADVANTAGE OF DEBENTURE
TO THE COMPANY  LONG- TERM CAPITAL  NO INTERFERENCE IN MANAGEMENT AND CONTROL  TAX BENEFITS

DISADVANTAGE OF DEBENTURE
TO THE COMPANY  FIXED FINANCIAL BURDEN
 DECREASE IN CREDITWORTHINESS  DANGER OF THE EXISTENCE OF THE

COMPANY

ADVANTAGE
TO INVESTORS  SAFETY AND SECURITY OF THE INVESTMENT  REGULAR FIXED INCOME  CONVERSION INTO SHARES

DISADVANTAGE
TO THE INVESTORS  NO CONTROL  NO EXTRA PROFIT

Term Loans

Term loan
 Long term source of debt finance.  Also known as project /term finance.  Primary source of such loans are financial institutions.

Its Features
 Maturity  Negotiated  Security  Interest payment and principal repayment

Its features
 Restrictive covenants


Negative covenants
 Asset related  Liability related

related  Control related


 Cash flow

Positive covenants

Working Capital

Working Capital Advance by commercial banks
1. Forms of bank finance
2. Nature of security

Forms of bank finance

1.Cash credits/Overdrafts 2.Loans

3.Purchase/Discount of bills
4.Letter of credit

Cash credits/Overdrafts
 Pre-determined limit for borrowings specified by the

bank  Borrower can draw as often as required but should not exceed the limit  Repayment of the amount as and when the borrower desires  Interest is charged on the running balance

Loans
 Advances of fixed amount  Interest is charged on the entire amount  Loans are payable either or on demand or in periodical

installments

Purchase/Discount of bills
 Seller draws the bill on the purchaser  On acceptance of the bill by the purchaser the seller

offers it to the bank  Bank releases the funds to the seller

Letter of credit
 Bank undertakes the responsibility to honour the

obligation of its customer
 Indirect form of financing

Security
 Hypothecation

Possession of the goods is with the owner
 Pledge

Possession of the goods is with the lender

LEASING
 2 parties :
 Lessee  Lessor

 The lessee hires the asset from the lessor and pays

rental over a pre-determined period for the use of the asset.

Sources of Finance ?

Lessor

Lessee

Target

FACTORING
 Factor : Financial institution which offers

services relating to financing of debts arising from credit sales e.g. Debtors

Client sells the goods on Credit to customer

Sends the invoice to the factor Factor pays 80-85% of an invoice amount to client

Factor follow up the customer

Customer pays to the factor Factor pays the balance amount to the client

 Non Recourse Facility : Credit risk is borne

by the factor
 Customer-wise Limit

Tools To Raise The Finance
 IPO : Selling of Securities in primary market  Its for an unlisted company to make either a fresh issue of

securities or an offer for sale of its existing securities or both for the first time to the public  Rights Issue : The rights of existing shareholders to buy a specified number of new shares from the firm at a specified price within a specified time  Bonus Shares : The company pays a bonus to its shareholders in the form of shares; a free share thus issued is known as a bonus share  Venture Capital : Is a type of private equity capital typically provided to early-stage, high-potential, growth companies


				
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