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SOURCES OF FINANCE

SUBMITTED BY: MANISH

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LEARNING OBJECTIVES

Various sources of short term and long term finance

Finance by financial institution

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INTRODUCTION

• It is rightly said that finance is the life-blood of business. No Business can be carried on without source of finance . The financial manager is mainly responsible for raising the required finance for the business. There are several sources of Finance and as such the finance has to be raised from the right kind of source.

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SOURCES OFFINANCE

SPONTANEOUSSOURCES

NEGOTIATEDSOURCES.

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• Spontaneous finance: Finance which naturally arises in the course of business is called as “spontaneous financing.”

Trade creditors, credit from employees, credit from suppliers of services etc are the examples of spontaneous financing.

 Negotiated financing: Financing which has to be negotiated with lenders, say commercial banks, financial institutions, general public are called as “negotiated financing.”

This financing may be short term in nature or long term.

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Sources Of Finance

Security Financing

Internal Financing

Loan Financing

Equity Shares

Preference Shares

Debentures

Retained Earnings

Depreciation Fund

Short-Term

Long-Term

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Long Term Source of Finance• Long term sources of finance are those that are

needed over a longer period of time - generally over a year.

• Long term finance may be needed to fund expansion projects

• IT’S TYPES ARE:-SHARE,DEBENTURE,VENTURE

CAPITAL,GOVERNMENT GRANT,BANK LOAN

MORTGAGE,OWNER CAPITAL,INTERNAL ACCURAL

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SHARESThe Total share capital of the

company divided into large number of parts of equal face value, each of such part is called share.

a) Equity share capital: Equity capital represents ownership capital as equity shareholders collectively own the company. They enjoy the rewards and bear the risk of ownership. However unlike the liability of the Equity share holder is limited to their contribution in the firm.

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Cont’d ADVANTAGES :-

• Dividend to the equity share holder.

• Maturity date and redemption.

• Tax exempt income of investors.

DISADVANTAGES :-• Sales of equity shares.

• Rate of return .

• Not a tax deductible income.

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Preference Shares Preference share represents that part of

share capital of a company , which carries preferential rights.

Important features of preference shares

1.Fixed rate of dividend

2.Normal voting rights.

3.Issued for a face value of Rs. 100

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Cont’d:• ADVANTAGES:- 1. Raising long term capital .2. Property Mortgage.3. Rate of return .4. No obligation to pay dividend.5. No dilution of control.• DISADVANTAGES:- 1. Permanent burden to pay dividend.2. Disadvantages to Investors.3. High cost of raising.

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Debenture:• Debenture is a certificate issued by a

company under its common seal acknowledging a debt by its holders.

• Important features of debentures:

1. Fixed rate of interest. 2. No profits but must pay. 3. Deductible expense. 4. Redemption. 5. Voting rights

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Bank loanA Business enterprise requires short-term

and long-term finance. It may raise financial resources by raising short-term loans and long-term loans.

Short-term Sources.Long-term Sources.

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venture capital

• Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital (money) to help the business grow. In return the venture capitalist gets some stakes in the running of the company as well as a share in the profits made.

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Government grant

• These grants are often linked to incentives to firms to set up in areas that are in need of economic development.

• One of the disadvantages of this type of funding is that it involves large amounts of paperwork and administration.

• This can add to costs and in some cases might not make the project worthwhile.

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mortgage

• A mortgage is a loan specially for the purchase of property.

• Mortgages are use as a security for a loan:- it is often called taking out a second mortgage. If

the business does not work out and the borrower could not pay the bank the loan then the bank has the right to take the home of the borrower and sell it to recover their money.

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OWNER'S CAPITAL • Some people are in a fortunate position of

having some money which they can use to help set up their business. The money may be the result of savings, money left to them by a relative in a will or money received as the result of a redundancy payment. This has the advantage that it does not carry with it any interest. It might not, however, be a large enough sum to finance the business fully but will be one of the contributions to the overall finance of the business

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Internal accruals• This is a source of finance that would only be

available to a business that was already in existence. Profits from a business can be used by the owners for their own personal use or can be used to put back into the business. This is often called laughing back the profits'.

• This finance can be used to buy new equipment and machinery as well as more stock or raw materials and hopefully make the business more efficient and profitable in the future.

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Cont’dADVANTAGES :- 1.They are readily available. Management does not have to talk

outsiders.2. Use of Internal Accruals eliminates issue cost and losses on

account of under pricing.3. There is no dilution of control when firm relies on these sources.DISADVANTGES :- 1. The amount through this source is limited 2. Higher the Retain earning lead to higher dissatisfaction among

the shareholders because it is the cost forgone by the shareholders.

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Short term sources of finance

• Short term financing is essential to provide capital deficit businesses funds for short term period of a year or less. These funds are usually for businesses to run their day-to –day operations including payment of wages to employees, inventory ordering and supplies .

These are the main short term sources of finance:-Bank overdraft , trade credit , credit card , and

short term bank loans etc.

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Bank over-draft. If the borrower requires temporary

finance , the banker may allow him to overdraw on his account with or without security

Cash credit Cash credit is a financial

arrangement through which the commercial banks allow the borrower to the borrow money up to a

certain limit

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Public deposit Business firm are raising short-term finance from

their member , directors and the general public.

Bills discounting The commercial banks advance to the borrower

by discounting his bill. Short-term loans The bankers makes a lump-sum payment to the

borrower or credit his deposit account with the money advanced..

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EXAMPLE OF LONG TERM AND SHORT TERM FINANCE :-

STANDARD CHARTED BANK MAHINDRA FINANCE

1.Equity Capital= 58% Equity Capital=42%

2.Internal Accruals (Reserve & Surplus)= 24%

Internal Accruals (Reserve & Surplus)= 12%

3.Debentures (Bond)= 20% Debentures (Bond)= 33%

4.Term Loans (Long Term)= 8% Term Loans (Long & Short Term)= 13%

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Comparison between both the companies

1. More hold on the company proceedings and company is having a high goodwill in the market.

Less hold as compare to SCB but still have a good hold and goodwill in the market.

2. Company can skip dividend on equity shares more than Mahindra Finance

Company can skip dividend on equity shares but less as compare to SCB.

5. The company is having low Tax deductible income.

More Debentures means company having more tax deductible income.

6. Low debt contract means less restrictions on the company.

High debt contract can lead to impose restriction.

7. Low percentage of term loans means company is having less dependence on the outside sources of finance.

High percentage of term loans means the company is having high dependence on the outside sources of finance

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thanks