LONG TERM AND SHORT TERM

SOURCES OF FINANCE .

BY,
PRATIK RAUT
AJINKYA PUJARI
DINESH RAWADE
SARVESH REVANKAR
 INTERNAL SOURCES OF FINANCE AND GROWTH

 ‘Organic growth’ – growth

generated through the development
and expansion of the business
itself. Can be achieved through:
 Generating increasing sales –
increasing revenue to impact on
overall profit levels
 Use of retained profit – used to
reinvest in the business
 Sale of assets – can be a double
edged sword – reduces capacity?

Selling more? Mind the queues.

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 EXTERNAL SOURCES OF FINANCE

 Long Term – may be paid back after

many years or not at all!
 Short Term – used to cover
fluctuations in cash flow
 ‘Inorganic Growth’ – growth
generated by acquisition

The existence of capital markets enable firms to raise

long term loans and share capital.
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LONG TERM SOURCES OF FINANCE.
 1)Equity or ordinary shares
 2)Preference shares
 3)Debentures
 4)Term loans
EQUITY OR ORDINARY SHARES.
 As per the co act 1956 an equity share is the share
which is not a preference share.The equity
shareholders do not have any prority reagarding
dividend or repayment of capital .

 *Features –
 1)Have the right to attend the annual general meeting
,they have the right to vote on all matters ,can also
appoint a proxy to vote on his behalf .
 2)Equity shareholders do not have any pref . In
getting the dividend.Sometimes they don’t even
get the dividend when the profits are not
sufficient.The dividend on shares is never fixed.

 3)As per co. law equity shareholders have the

right to purchase new shares in the same
proportion as their current ownership.
 *Advantages of issuing equity shares—
 1)It is the permanat source of capital .Repayment would be
done only when the co. is wound up.

 2)It is not compulsory for the co. to pay dividends on equity

shares.

 3)Equity shares serve as the base for the co. The co . Can
increase the borrowing capacity by issuing additional
equ.shares.
DEBENTURES
 A co. can also raise funds by sale of debentures.
A debenture is an acknowledgement of a debt taken by
the co.The co has to repay the amount after the
maturity period is over .

*Features—
1)The rate of interest on debentures is fixed.
2)A debenture may be secured or unsecured.
3)Debentures have fixed maturity period.
PREFERENCE SHARES
 Preference shares are those shares which have a priority
over equity shareholders regarding payment of dividend
and repayment of capital at the time of liquidation of the
co.

 *features—
 1)Pref is receiving dividend ,their dividend can be
accumulated .
 2)Pref . Shareholders can vote in general meeting only on
matters directly connected to them .
 3)Pref shares are reedemable.. ie the amount must
be repaid within 10 yrs from the date of issue .
 4)Dividend is fixed but if participating shares ,the
holder can get a share in super profits of the co.
TERM LOANS
 In addition to debentures the co. can raise borrowings through term
loans. A term loan is a loan which has maturity period of more than
one yr. Such term loans are used to finance long term requirements .

 *features—
 1)The maturity period varies from 3 to 10 yrs .
 2)Term loans are secured by security given to the borrower .
 3)The lender can put restrictions to the co. as he is interested in the
safety of capital.These restrictions are know as “restictive
convenants”.
 4)Can be converted into Equity capital .
SHORT TERM

 Bank loans – necessity of paying interest on

the payment, repayment periods from 1 year
upwards but generally no longer than 5 or 10
years at most
 Overdraft facilities – the right to be able to
withdraw funds you do not currently have
 Provides flexibility for a firm
 Interest only paid on the amount overdrawn
 SHORT TERM

 Overdraft limit – the maximum amount allowed to be

drawn - the firm does not have to use all of this limit
 Trade credit – Careful management of trade credit can
help ease cash flow – usually between 28 and 90 days to
pay
 Factoring – the sale of debt to a specialist firm who
secures payment and charges a commission for the
service.
 Leasing – provides the opportunity to secure the use of
capital without ownership – effectively a hire agreement
SHORT-TERM FINANCE SERVES FOLLOWING PURPOSES

 1. It facilitates the smooth running of business

operations by meeting day to day financial
requirements.
 2. It enables firms to hold stock of raw materials
and finished product.
 3. With the availability of short-term finance
goods can be sold on credit. Sales are for a certain
period and collection of money from debtors takes
time. During this time gap, production continues
and money will be needed to finance various
operations of the business.
 4. Short-term finance becomes more essential
when it is necessary to increase the volume of
production at a short notice.
 5. Short-term funds are also required to allow
flow of cash during the operating cycle.
Operating cycle refers to the time gap between
commencement of production and realisation of
sales.
SOURCES OF SHORT-TERM FINANCE
 1. Trade credit
 2. Bank credit
– Loans and advances
– Cash credit
– Overdraft
– Discounting of bills
 3. Customers’ advances
 4. Instalment credit
 5. Loans from co-operatives
MERITS OF SHORT-TERM FINANCE

 a) Economical : Finance for short-term purposes can be arranged

at a short notice and does not involve any cost of raising. The
amount of interest payable is also affordable. It is, thus, relatively
more economical to raise short-term finance.

 b) Flexibility : Loans to meet short-term financial need can be

raised as and when required. These can be paid back if not
required. This provides flexibility.
 c) No interference in management : The lenders of short-term
finance cannot interfere with the management of the borrowing
concern. The management retain their freedom in decision
making.
 d) May also serve long-term purposes : Generally business
firms keep on renewing short-term credit, e.g., cash credit is
granted for one year but it can be extended upto 3 years with
annual review. After three years it can be renewed. Thus, sources
of short-term finance may sometimes provide funds for long-term
purposes.
DEMERITS OF SHORT-TERM FINANCE
 a) Fixed Burden : Like all borrowings interest has to
be paid on short-term loans irrespective of profit or loss
earned by the organisation. That is why business firms
use short-term finance only for temporary purposes.
 b) Charge on assets : Generally short-term finance is
raised on the basis of security of moveable assets. In
such a case the borrowing concern cannot raise further
loans against the security of these assets nor can these
be sold until the loan is cleared (repaid).
 c) Difficulty of raising finance :When business firms
suffer intermittent losses of huge amount or market
demand is declining or industry is in recession, it loses
its creditworthiness. In such circumstances they find it
difficult to borrow from banks or other sources of short-
term finance.
 d) Uncertainty : In cases of crisis business firms always
face the uncertainty of securing funds from sources of
short-term finance. If the amount of finance required is
large, it is also more uncertain to get the finance.
 e) Legal formalities : Sometimes certain legal
formalities are to be complied with for raising
finance from short-term sources. If shares are to
be deposited as security, then transfer deed must
be prepared. Such formalities take lot of time and
create lot of complications.
Thank You