SOURCES OF FINANCE

SUBMITTED BY: MANISH
1

LEARNING OBJECTIVES
Various sources of short term and long term finance Finance by financial institution

2

The financial manager is mainly responsible for raising the required finance for the business. No Business can be carried on without source of finance .INTRODUCTION • It is rightly said that finance is the life-blood of business. 3 . There are several sources of Finance and as such the finance has to be raised from the right kind of source.

4 .SOURCES OF FINANCE SPONTANEOUS SOURCES NEGOTIATED SOURCES.

” Trade creditors. Negotiated financing: Financing which has to be negotiated with lenders. general public are called as “negotiated financing. credit from suppliers of services etc are the examples of spontaneous financing. financial institutions.• Spontaneous finance: Finance which naturally arises in the course of business is called as “spontaneous financing. say commercial banks.” This financing may be short term in nature or long term. credit from employees. 5 .

Sources Of Finance Loan Financing Security Financing Internal Financing Equity Shares Retained Earnings Short-Term Preference Shares Depreciation Fund Long-Term Debentures 6 .

OWNER CAPITAL.generally over a year. • Long term finance may be needed to fund expansion projects • IT’S TYPES ARE:SHARE.Long Term Source of Finance • Long term sources of finance are those that are needed over a longer period of time .BANK LOAN MORTGAGE.GOVERNMENT GRANT.VENTURE CAPITAL.DEBENTURE.INTERNAL ACCURAL 7 .

8 . each of such part is called share.SHARES The Total share capital of the company divided into large number of parts of equal face value. They enjoy the rewards and bear the risk of ownership. a) Equity share capital: Equity capital represents ownership capital as equity shareholders collectively own the company. However unlike the liability of the Equity share holder is limited to their contribution in the firm.

9 . • Maturity date and redemption. DISADVANTAGES :• Sales of equity shares.Cont’d ADVANTAGES :- • Dividend to the equity share holder. • Not a tax deductible income. • Rate of return . • Tax exempt income of investors.

Normal voting rights.Preference Shares  Preference share represents that part of share capital of a company .Issued for a face value of Rs. Important features of preference shares 1. 100 10 .Fixed rate of dividend 2. 3. which carries preferential rights.

Cont’d: 11 . 4. Permanent burden to pay dividend. No obligation to pay dividend. No dilution of control. Property Mortgage. 2.• ADVANTAGES:1. • DISADVANTAGES:1. High cost of raising. 5. 3. Disadvantages to Investors. Rate of return . 3. 2. Raising long term capital .

4. 2. 3. 5. Redemption. Deductible expense. • Important features of debentures: 1. Voting rights 12 . No profits but must pay. Fixed rate of interest.Debenture: • Debenture is a certificate issued by a company under its common seal acknowledging a debt by its holders.

13 . It may raise financial resources by raising short-term loans and long-term loans.Bank loan A Business enterprise requires short-term and longterm finance. Short-term Sources. Long-term Sources.

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. 14 . Venture capitalists are on the look out for companies with potential.venture capital • Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies.

Government grant • These grants are often linked to incentives to firms to set up in areas that are in need of economic development. • This can add to costs and in some cases might not make the project worthwhile. • One of the disadvantages of this type of funding is that it involves large amounts of paperwork and administration. 15 .

mortgage • A mortgage is a loan specially for the purchase of property. 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. • Mortgages are use as a security for a loan:it is often called taking out a second mortgage. 16 .

however. money left to them by a relative in a will or money received as the result of a redundancy payment.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. It might not. This has the advantage that it does not carry with it any interest. be a large enough sum to finance the business fully but will be one of the contributions to the overall finance of the business 17 .

Internal accruals • This is a source of finance that would only be available to a business that was already in existence. 18 . This is often called laughing back the profits'. 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 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.

Cont’d ADVANTAGES :1. There is no dilution of control when firm relies on these sources. Higher the Retain earning lead to higher dissatisfaction among the shareholders because it is the cost forgone by the shareholders. Use of Internal Accruals eliminates issue cost and losses on account of under pricing. Management does not have to talk outsiders. 19 . 3. The amount through this source is limited 2. DISADVANTGES :1. 2.They are readily available.

and short term bank loans etc. trade credit . inventory ordering and supplies .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. 20 . These funds are usually for businesses to run their day-to –day operations including payment of wages to employees. These are the main short term sources of finance:Bank overdraft . credit card .

 Bank over-draft. 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 21 . If the borrower requires temporary finance .

Public deposit Business firm are raising short-term finance from their member . 22 . Short-term loans The bankers makes a lump-sum payment to the borrower or credit his deposit account with the money advanced.. directors and the general public. Bills discounting The commercial banks advance to the borrower by discounting his bill.

Internal Accruals (Reserve & Surplus)= 24% 3.Debentures (Bond)= 20% Internal Accruals (Reserve & Surplus)= 12% Debentures (Bond)= 33% 4.Term Loans (Long Term)= 8% Term Loans (Long & Short Term)= 13% 23 .Equity Capital= 58% MAHINDRA FINANCE Equity Capital=42% 2.EXAMPLE OF LONG TERM AND SHORT TERM FINANCE :STANDARD CHARTED BANK 1.

Low percentage of term loans means company is having less dependence on the outside sources of finance. 6. High debt contract can lead to impose restriction. More hold on the company proceedings Less hold as compare to SCB but still have a and company is having a high goodwill in the good hold and goodwill in the market. 2. High percentage of term loans means the company is having high dependence on the outside sources of finance 24 . market. The company is having low Tax deductible income. 7. Company can skip dividend on equity shares more than Mahindra Finance 5. More Debentures means company having more tax deductible income. Low debt contract means less restrictions on the company.Comparison between both the companies 1. Company can skip dividend on equity shares but less as compare to SCB.

thanks 25 .

Master your semester with Scribd & The New York Times

Special offer for students: Only $4.99/month.

Master your semester with Scribd & The New York Times

Cancel anytime.