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Source of finance

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Financial Needs

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Sources of Raising of Finance

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Sources of funds can also be classified into following categories:

1.

Security Financing: Financing through Shares & Debentures Internal Financing: Financing through Retained Earning, Depreciation Loan Financing: Financing through both Short term & Long term loans. International Financing: ADR etc.

2.

3.

4.

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Source of Finance

Equity Capital:

Equity Shareholders are the owners of the business. They enjoy the residual profits of the company after having paid the preference shareholders and other creditors of the company. Their liability is restricted to the amount of share capital they contributed to the company.

Equity capital provides the issuing firm the advantage of not having any fixed obligation for dividend payment but offers permanent capital with limited liability for repayment.

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Merit of Equity Share Capital from the point of view of company

Permanent Capital

No Fixed Obligation No Security Enhances the Capacity to Raise Further Debt No Risk of Financial Insolvency Right Issue

Limitation of Equity Share Capital from the point of view of company

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High Cost Control gets diluted Increased Agency Cost

Merits of Equity Share Capital from the point of view of shareholder

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Voting Right High Dividend Bonus Share Capital Appreciation High Liquidity

Limitation of Equity Share Capital from the point of View of Shareholder:

1. 2.

Uncertainty of Earnings High Risks

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Preference Capital
As per the section 85 of company Act , 1956, a preference share is one which carries two rights:

1. 2.

A right to receive dividend A right to receive repayment of capital, in case of liquidation, before the capital of equity shareholder is returned.

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Kinds of Preference Share

Cumulative or Non-Cumulative Preference Share Redeemable or Irredeemable Preference Share Convertible or Non-Convertible Preference Share

Merits of Preference Share from the point of view of company

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Low Cost No Risk of Loss of Control No Security No Risk of Financing Insolvency Advantage of Trading on Equity

Limitation of Preference Share Capital from the point of view of company

Cost higher than that of Debt

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Not Permanent Capital Not attract many Investors

Merits of Preference Share Capital from the point of view of Shareholder:

Preferential right as to the payment of dividend No reduction in dividend Accumulation of dividend Redeemable

1. 2. 3. 4.

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Debentures
A debenture is a written instrument acknowledging a debt and containing provisions as regards the repayment of principal and the payment of Interest at a fixed rate.

Main features of the debenture are as:

1. 2. 3.

Fixed Interest No Voting Right Redeemable

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Kinds of Debenture
Unsecured Debenture

Secured Debenture First Mortgage Debenture Second Mortgage Debenture Convertible Debenture Non-Convertible Debenture

Merits of Debentures from the point of view of the company

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Low Cost No Risk of Loss of Control Advantage of Trading on Equity

Limitation of Debentures from the Point of view of the Company:

1. 2. 3.

Risk of Financial Insolvency Security Increases Risk of Shareholder

Long Term loan from financial institution

Term loan represents secured borrowings for a period normally exceeding 5 Years.

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Merits of Long-Term Loans

1. 2.

Low Cost Advantage of Trading on Equity

Limitation of Long-Term Loans

Risk of Financial Insolvency Security

1. 2.

Venture capital financing

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SOURCES - Equity Fund

-

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Promoters and family Associates Institutions PVT EQUITY FUND Public

-VENTURE -

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Role of VC
Venture Capitalist fills this gap by providing Value Added Finance

VENTURE CAPITAL .Characteristics

Spirit of partnership Risk - Reward sharing Active participation and value addition Long term perspective Investment and not assistance Returns linked to performance Expects high returns CONVENTION

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CONVENTIONAL V/S V.C FUNDING

CONVENTIONAL V/S V.C FUNDING Security backed Passive role Fixed obligation Term loans Risk averse Short and medium term Perspective

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Why Venture Capital

Has the potential to finance start-ups as venture capitalists are generally willing to accept high levels of risks for high potential profits Do not require collateral nor charge interest payments Long-term or at least medium term capital Contribute to the management of the firm

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Lease Financing
Leasing is an alternative to the purchase of an asset out of owned or borrowed funds. Under leasing, the asset is purchased initially by the lessor (Leasing Company) and thereafter leased to the user (Lessee company) which pays specified rent ( Lease rent) at specified intervals.

Lease: is an agreement whereby the owner of an asset grants to the user the right to use an asset for payment of periodic rentals over agreed period of time.

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Contd..
Lessor:
person or entity who owns the asset and who grants the right to use the asset for a payment of periodic rental over agreed period of time.

Lessee: person or entity who acquires the right to use the

asset from the owner of the asset for a payment of periodic rentals over agreed period of time.

Lease Rentals:

is a series of periodic payment over agreed period of time by the user of the asset to the owner of the asset for acquiring the right to use the asset, are called lease rentals

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FEATURES
Leasing

a product is similar to renting it

contract lasts over a number of years, usually between 2 and 10, depending on the cost and usable life of the product. the full use of a piece of equipment without having to pay the full cost of the item in one go.

Have

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FINANCIAL LEASE(CAPITAL LEASE)

Long-term, non-cancellable lease contracts are known as financial leases.

The essential point - it contains a condition whereby the Lessor agrees to transfer the title for the asset at the end of the lease period at a nominal cost

At lease it must give an option to the lessee to purchase the asset he has used at the expiry of the lease.

High cost high tech equip

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Contd..

The lease agreement is irrevocable. All the risks incidental to the asset ownership are transferred to the lessee who bears the cost of maintenance, insurance and repairs title deeds remain with the lessor

Only

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OPERATING LEASE

Contrast to the financial lease. A lease agreement gives to the lessee only a limited right to use the asset. The lessor is responsible for the upkeep and maintenance of the asset. The lessee is not given any uplift to purchase the asset at the end of the lease period

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Trade Credit
Trade Credit:
Trade credit refers to an arrangement whereby the suppliers of raw material, component, stores and spare parts, finished goods, allow the customer to pay their outstanding balances within the credit period allowed by them. Generally, suppliers grant credit for a period of three to six months and thus provide short term funds to finance current asset.

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Merits of Trade Credit

Trade credit is readily available according to the prevailing customs. Trade credit is a flexible sources of finance which can be easily adjusted to the changing needs for purchases. Trade creditors generally adjust the time of payment in view of past dealings. Trade credit does not involve any flotation cost.

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Limitation of trade credit

The cost of Trade Credit may increase if the supplier

tries to pass on it to the buyer in the shape of increased prices.

Payment of bill of exchange accepted or promissory not issued against credit is required to be made at the maturity of the bill or note otherwise legal action may follow to recover the payment.

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Commercial Paper