2. Introduction:
Decide which
assets to buy
To decide Determining
what is total
sources to
tap the total
Decision investment
required for
investment. making buying
assets.
How much
working
capital
required.
3. Parameter for choosing sources of
fund
โข Cost of source of fund.
โข Tenure.
โข Leverage planned by the company.
โข Financial condition prevalent in the economy.
โข Risk profile of both the company as well as the
industry in which the company operates.
5. Classification according to term
finance
โข Short term finance.
โข Medium term finance.
โข Long term finance.
6. Short Terms Finance
โข Short term finance are required primarily to
meet working capital requirements.
โข The focus is on maintaining liquidity at a
reasonable cost.
7. Working
Capital
finance
Commercial
Trade Credit
Paper
Short
Term
Finance
Inter-
Factoring Corporate
Deposits
8. Working Capital Finance By
Commercial Banks
โข Commercial banks grants short terms finance to
business firms which is known as โBank Creditโ.
โข Bank Credit may be granted in the following
ways:-
๏ Loans
๏ Purchase/ Discounting of bills.
๏ Cash Credit
๏ Over draft
9. Trade Credit
โข Trade credit represents credit granted by the
suppliers of goods, etc. as an incident of sale.
Merits Demerits
Credit for the purpose Less flexible
of raw material or
finished goods.
No security
No interest payable
10. Inter Corporate deposits
โข A deposit made by one company to another is
called as inter-corporate deposit.
โข It is generally for working capital funding & is
for period not exceeding six months.
11. Factoring
Factoring is an agreement in which receivable
arising out of sale are sold by a firm (client) to
the factor (a financial intermediary).
12. Advantages
โข Establish a strong foundation.
โข Maximize profitability.
โข Capture growth opportunities.
Disadvantages
โข Cost.
โข Possible harm to customer relation.
โข Company image distortion.
14. Advantages
โข High credit ratings
โข Flexibility.
โข Provides exit options.
Disadvantages
โข Limited applicability.
โข Low bank credit limits.
โข A high degree of control.
15. Medium Term Finance
๏ผMedium term finance is defined as money
raised for a period for 1 to 5 years.
๏ผThe medium term funds are required by a
business mostly for the repaired and
modernizing of machinery.
16. Medium Term Finance
Commercial
Banks & External Euro &
Lease Hire
State Commercial Foreign
Financing Purchase
Financial Borrowings Bonds
Institutions
17. Lease financing
โข It is a contract In which the assets is purchased
initially by the lessor(leasing company) and
thereafter leased to the user(leasee company)
who pays a specified rent at periodical intervals.
18. Advantages & Disadvantage
๏ The holder only pays ๏ Commitment to contract
for use. for entire valid period.
๏ Better liquidity. ๏ Higher fixed cost per
month.
๏ Fixed rate.
๏ More expensive than
๏ Minimal sales risk. purchase.
19. Hire Purchasing
โข Hire purchase transaction, the goods are
delivered by the owner to another person the
agreement that such person pays the agreed
amount in the periodical installment.
20. Advantage Disadvantages
โข Cheaper than a โข Higher monthly
(โunsecuredโ) personal payment;
loan.
โข relatively quick. โข hidden fees
โข Deposits are lower than
with personal loans.
21. EXTERNAL COMMERCIAL
BORROWING::--
1. ECBโs refer to commercial loan in the form of bank
loans, buyers credit, suppliers credit, securitized
instruments.(E.g. Floating rates notes and Fixed
rates bonds) availed from non-resident lenders with
minimum average maturity years.
2. ECBs mean foreign currency loan raised by residents
from recognized lenders. Financial leases and Foreign
Currency Convertible Bonds are also covered by ECB
guidelines.
22. Euro bonds::--
โข Definition of Euro Bond::--
โA bond issued in a
currency other than the currency of the country
or market in which it is issued.โ
โข Eurobonds are attractive to investors as they have
small par values and high liquidity.
23. Advantages
โข Increased liquidity of European bond markets.
โข Protection from large market shocks and erratic
market.
โข Discipline, guaranteed funding for all EMU
countries.
24. Disadvantages
The main disadvantages are :
โข Possible free-riding problems.
โข Tensions with the no-bailout clause.
โข Credibility and political viability.
26. Long Term Finance
โข Long term finance refer to those requirements
of funds which are for a period exceeding 5-10
years.
27. Share
Securitization Debentures
Long
Venture
term New Debt
Capital
finance Instruments
Depository Retained
Schemes Earnings
28. SHARES
A shares indicates a smaller unit into which the
overall requirement of a company is subdivided.
TYPES OF SHARES
THERE ARE TWO TYPES:
๏Equity shares
๏Preference shares
29. DEBENTURES
โข It means a document containing
acknowledgement of indebtedness issued by a
company and giving an undertaking to repay
the debt at a specified date.
30. NEW DEBT INSTRUMENT
โข Zero interest bond (ZIB)
โข Deep discount bonds (DDB)
โข Junk bonds
โข Convertible debenture
31. Retained Earnings
โข Retained earnings means that part of trading
profits which is not distributed in the form of
dividends but retained by directors for future
expansion of the company.
33. Global/ American/ Indian
Depository Receipts
โข GDRs :-
A negotiable certificate held in the bank of one country
representing no. of shares traded on the exchange of
another country.
โข ADRs :-
It allows US investors to buy shares of ADS companies
without the cost of investing directly in Foreign Stock
Exchange.
โข IDRs :-
It allows foreign companies to raise the funds from
Indian markets.
34. Venture Capital
โข The venture capital financing refers to
financing & funding of the small scale
enterprises, high technology & risky volumes.
35. Securitization
โข Securitization is a process in which illiquid
assets are pooled into marketable securities
that can be sold to investors.
Advantages Disadvantages
Reduces assets liability Cost
mismatch
Locking in profits Size limitation
Liquidity Risk
36. Some Important Sources Of Finance
โข Seed capital assistance.
โข Certificate of deposit.
โข Internal cash accrual
38. Certificate of deposit
โข CD is a document of title similar to a time deposit
receipt issued by a bank exepct that there is no
prescribe interest rate on such funds.
โข The main advantage of cd is the baker is not required
to encash the deposit before maturity period and the
investor is assured of liquidity because he can sell the
cd in secondary market.
39. Internal cash Accruals
โข Existing profit making companies which
undertake an expansion programe may be
permitted to invest a part of their
accumulated reserves or cash profit for
creation of capital assets.
40. Example Of Long Term & Short Term
Finance
Standard Chartered Bank Mahindra Finance
Equity capital = 58% Equity capital = 42%
Internal accrual (reserve & surplus) =24% Internal accrual (reserve & surplus) =12%
Debentures (bonds) = 20% Debentures (bonds) = 33%
Term (long term) = 8% Term (long & short term) = 13%
41. Comparison Between both the
companies
More hold on the companies proceedings & Less hold as compare to SCB but have a
company is having high goodwill in the good hold and goodwill in the market.
market.
Company can skip dividends on equity shares Company can skip dividends on equity shares
more than Mahindra finance. but less as compared to SCB.
The company is having low tax deductible More debentures means more tax deductible
income. income.
Low debt contract means less restrictions on High debt contract can lead to impose
the company. restrictions.
Low percentage of term loans means High percentage of term loans means
company is having less dependence on the company is having high dependence on the
outside sources of finance. outside sources of finance.
