MODULE OF INSTRUCTION

Module 7
Special Financing

This is the last module for this course and you will be learning the
basic definition of selected special financing options that a business
can have. Then you will be discovering their advantage and
disadvantages in your activity.

After going over this chapter, you should be able to learn, distinguish
and discover more things on

Lease Financing
Venture Capital
Factoring
Foreign Direct Investment
Merchant Banking
Mutual Funds

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Special finance is an industry for borrowers with a limited or tainted

credit history. Special financing is risk based, this means that the terms
of the loan are set so that the expected returns to the lender or investor
are great enough to cover the risk of default by the borrower. Special
finance loans typically carry a higher interest rate than is available to
borrowers with a clean credit history (Investopedia).

Lease Financing
Lease may be defined as a contractual arrangement in which a party
owning an asset provides the asset for use to another, the right to use
the assets to the user over a certain period of time, for consideration in
form of periodic payment, with or without a further payment. Lease
financing is one of the popular and common methods of assets based
finance, which is the alternative to the loan finance. Lease is a
contract. It is contractual agreement between the owner of the assets
and user of the assets for a specific period by a periodical rent.

Venture Capital
The term Venture Capital fund is usually used to denote mutual funds
or institutional investors. This is the money provided by investors
to startup firms and small businesses with perceived long-term
growth potential. This is a very important source of funding especially
for new businesses that do not yet have access to capital markets.
Venture Capital termed as long-term funds in equity or semi-equity
form which involves high risk but has strong potential of high
profitability.

Factoring
This is financing method in which a business owner sells accounts
receivable at a discount to a third-party funding source to raise capital.
Here the risk of credit, risk of credit worthiness of the debtor and as
number of incidental and consequential risks are involved. These risks
are taken by the factor which purchase these credit receivables without
recourse and collects them when due. These balance-sheet items are
replaced by cash received from the factoring agent.

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Foreign Direct Investment

This is an investment made by a company from one country into a
company from another country. In this type of financing, overseas
institutions invest in equities listed on the national stock exchange.
This can provide the receiving firm with the investment, new
technologies, capital, processes, products, organizational and
management technologies which can help in economic development.

Merchant Banking
Merchant banking is one of the fee based financial services which
includes underwriting, consultancy and other allied services to the
business concern. This is basically a service banking which provides
non-financial services such as issue management, portfolio
management, asset management, underwriting of new issues, to act as
registrar, share transfer agents, trustees, provide leasing and project
consultation. The merchant banks may function in the form of a bank,
financial institutions, company or firm.

Mutual Fund
A mutual fund is an investment vehicle for investors who pool their
savings for investing in diversified portfolio of securities with the aim
of attractive yields and appreciation in their value. The pool of funds
collected from many investors is for the purpose of investing in
securities such as stocks, bonds, money market instruments and similar
assets. Mutual fund is a trust that attracts savings which are then
invested in capital markets. These are operated by money managers,
who invest the fund's capital and attempt to produce capital gains and
income for the fund's investors. A mutual fund's portfolio is structured
and maintained to match the investment objectives stated in
its prospectus.

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Exercise 7
1. Give situational examples for each of the special financing.
2. Cite the advantages and disadvantages of using each type of
financing.

Activity 7
Create a video of yourself while orally answering the following
questions.
1. What are the top three learning that you have grasped from this
course?
2. How can financial management help you in your career?

Glossary
Factoring- selling of accounts receivable at a discount to a third-party
funding source to raise capital.

Foreign Direct Investment-an investment made by a company from

one country into a company from another country.

Lease Financing - defined as a contractual arrangement in which a

party owning an asset provides the asset for use to another, the right to
use the assets to the user over a certain period of time, for
consideration in form of periodic payment, with or without a further
payment.

Merchant Banking-one of the fee based financial services which

includes underwriting, consultancy and other allied services to the
business concern.

Mutual Fund- is an investment vehicle for investors who pool their

savings for investing in diversified portfolio of securities with the aim
of attractive yields and appreciation in their value.

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Venture Capital- the money provided by investors to startup firms and

small businesses with perceived long-term growth potential.

References
C. Paramasivan and T. Subramanian. (2005). “Financial
Management”, New Age International Ltd., Publishers.

Investopedia.com

J. Van Horne and J. Wachowics(2008). “Fundamentals of Financial

Management”, Pearson Education Limited.

Financial Management 5