sources of finance

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sources of finance

  1. 1. SOURCES OF FINANCESOURCES OF FINANCE
  2. 2. ACCORDING TO PERIODACCORDING TO PERIOD Short Term Medium Term Long Term •Trade Credit •Bank financing •Customer Advances •Factoring •Accruals •Deferred Incomes •CPs •Installment Credit •Credit cards •Bill financing •Inter corporate deposits •Issue of Debentures •Issue of Preference Shares •Bank Loans •Public Deposits/Fixed Deposits •Hire purchase •Lease financing •Equity financing •Preference shares •Debt financing •Venture capital financing •Internal financing •International financing
  3. 3.  According to OwnershipAccording to Ownership Owned Capital-Owned Capital- Share Capital, Retained Earnings,Share Capital, Retained Earnings, Profit Surplus etcProfit Surplus etc Borrowed Capital-Borrowed Capital- Debentures, Bonds, PublicDebentures, Bonds, Public Deposit, loansDeposit, loans  According to source of FinanceAccording to source of Finance External-External- Shares, Debentures, Public Deposit,Shares, Debentures, Public Deposit, loans etc.loans etc. Internal-Internal- Retained Earnings, Profit SurplusRetained Earnings, Profit Surplus ploughing back of profits, depreciation fund etcploughing back of profits, depreciation fund etc
  4. 4. LONG TERM FINANCINGLONG TERM FINANCING 11.. Equity Financing or sharesEquity Financing or shares CharacteristicsCharacteristics 1.1. MaturityMaturity 2.2. Claims/ Right to IncomeClaims/ Right to Income 3.3. Claim on AssetClaim on Asset 4.4. Right to control or Voting RightRight to control or Voting Right 5.5. Pre-Emptive RightPre-Emptive Right 6.6. Limited LiabilityLimited Liability
  5. 5. Advantages & DisadvantagesAdvantages & Disadvantages DisadvantagesDisadvantages To CompanyTo Company  Not to be paid fixedNot to be paid fixed dividenddividend  No charge over asset atNo charge over asset at the time of issuethe time of issue  Permanent source ofPermanent source of incomeincome To share HolderTo share Holder  Voting rightVoting right  Benefited at the time ofBenefited at the time of high profitshigh profits To CompanyTo Company  If only equity shares issuedIf only equity shares issued co. cannot take theco. cannot take the advantage of trading onadvantage of trading on equityequity  Can put obstacles inCan put obstacles in managementmanagement To share HolderTo share Holder  Not suitable for one whoNot suitable for one who want fixed income andwant fixed income and secured investmentsecured investment AdvantagesAdvantages
  6. 6. 22 .. Preference Shares:Preference Shares:  CharacteristicsCharacteristics 1.1. MaturityMaturity 2.2. Claim on IncomeClaim on Income 3.3. Claim on AssetClaim on Asset 4.4. ControlControl 5.5. Hybrid form of InvestmentHybrid form of Investment 6.6. Cumulative dividendsCumulative dividends 7.7. Fixed income securityFixed income security 8.8. Participation featureParticipation feature 9.9. ConvertibilityConvertibility 10.10. Voting rightsVoting rights 11.11. Call and put provisionCall and put provision 12.12. Controlling powerControlling power
  7. 7. TYPES:TYPES:  Cumulative Preference SharesCumulative Preference Shares  Non CumulativeNon Cumulative  RedeemableRedeemable  IrredeemableIrredeemable  ParticipatingParticipating  Non ParticipatingNon Participating  ConvertibleConvertible  Non ConvertibleNon Convertible  Cumulative convertible preference shares (CCP)Cumulative convertible preference shares (CCP)
  8. 8. Advantages (to company)Advantages (to company)  No obligation to pay dividendNo obligation to pay dividend  Provide long term capitalProvide long term capital  No liability to redeem pref. shareNo liability to redeem pref. share  Fixed rate of dividend is to be paid so co. can go forFixed rate of dividend is to be paid so co. can go for trading on equitytrading on equity  No voting rightsNo voting rights  No specific asset is pledged for the issueNo specific asset is pledged for the issue Advantages (to share holder)Advantages (to share holder) Fixed dividendFixed dividend Superior security over equitySuperior security over equity Preference in payment of dividend, capitalPreference in payment of dividend, capital
  9. 9. Disadvantages (to company)Disadvantages (to company)  Expensive source as expected dividend is highExpensive source as expected dividend is high  Permanent burden in case of cumulative preference sharesPermanent burden in case of cumulative preference shares  Although no legal obligation to pay dividend but continuousAlthough no legal obligation to pay dividend but continuous delay affect creditworthinessdelay affect creditworthiness  Dividend do not save taxDividend do not save tax  Some preference sh. Carry voting rights alsoSome preference sh. Carry voting rights also Disadvantages (to Share holders)Disadvantages (to Share holders) More fluctuations in market price as compared to theMore fluctuations in market price as compared to the debenturesdebentures No voting rightsNo voting rights No charge over assetsNo charge over assets
  10. 10. 3. Deferred shares3. Deferred shares 4. No par stock shares4. No par stock shares 5. Shares with differential Rights5. Shares with differential Rights 6. Sweat Shares6. Sweat Shares
  11. 11. 7. Debt financing7. Debt financing (a) Debentures:(a) Debentures: CharacteristicsCharacteristics 1.1. MaturityMaturity 2.2. Claim on IncomeClaim on Income 3.3. Claim on AssetClaim on Asset 4.4. Trust deedTrust deed 5.5. Interest rateInterest rate 6.6. RedemptionRedemption 7.7. Debenture redemption reserve (DDR)Debenture redemption reserve (DDR) 8.8. Call & put provisionCall & put provision 9.9. SecuritySecurity 10.10. ConvertibilityConvertibility 11.11. Credit ratingCredit rating
  12. 12.  Simple, Naked,Simple, Naked, UnsecuredUnsecured  Secured or MortgagedSecured or Mortgaged  BearerBearer  RegisteredRegistered  RedeemableRedeemable  IrredeemableIrredeemable  Convertible:Convertible: FCDFCD PCDPCD NCDNCD  Zero interest bonds or debenturesZero interest bonds or debentures  First debenture and secondFirst debenture and second debenturedebenture  Guaranteed debenturesGuaranteed debentures  Collateral debenturesCollateral debentures  Deep discount bonds (DDB)Deep discount bonds (DDB) Types:
  13. 13. AdvantagesAdvantages To CompanyTo Company 1.1. Long term fundsLong term funds 2.2. Low rate of interest as compared to dividendLow rate of interest as compared to dividend 3.3. No dilution of controlNo dilution of control 4.4. Addition of debenture in capital structure increases the EPSAddition of debenture in capital structure increases the EPS 5.5. Can be redeemed any time with the availability of surplusCan be redeemed any time with the availability of surplus fundsfunds  To share holderTo share holder 1.1. Fixed , regular source of incomeFixed , regular source of income 2.2. Security of investmentSecurity of investment 3.3. Definite maturity periodDefinite maturity period
  14. 14. DisadvantagesDisadvantages  To companyTo company 1.1. Fixed interestFixed interest 2.2. Charge on assetsCharge on assets 3.3. It generally increases the risk on investor thereby increasingIt generally increases the risk on investor thereby increasing the cost of equity capitalthe cost of equity capital 4.4. High stamp duty increases the cost of issueHigh stamp duty increases the cost of issue 5.5. Cannot be used by the company having highly elasticCannot be used by the company having highly elastic demand, instable earnings, insufficient fixed assetsdemand, instable earnings, insufficient fixed assets  To ShareholdersTo Shareholders 1.1. No voting rightsNo voting rights 2.2. Merely creditors not the ownersMerely creditors not the owners 3.3. Uncertainty in redemptionUncertainty in redemption
  15. 15. (b) Term loans (from FI)(b) Term loans (from FI) 8. Venture capital financing8. Venture capital financing
  16. 16. 9. Internal financing9. Internal financing  NeedNeed 1.1. Replacement of fixed assetsReplacement of fixed assets 2.2. Expansion plansExpansion plans 3.3. Contributing towards fixed or workingContributing towards fixed or working capital requirementscapital requirements 4.4. Improve efficiency of plant andImprove efficiency of plant and equipmentsequipments 5.5. Redemption of loans etcRedemption of loans etc (a) Retained earning:(a) Retained earning:
  17. 17. Factors Influencing:  Earning CapacityEarning Capacity  Desire and type of shareholdersDesire and type of shareholders  Future financial requirementsFuture financial requirements  Dividend policyDividend policy  Taxation policyTaxation policy
  18. 18. AdvantagesAdvantages To CompanyTo Company  Absorption of economic shocksAbsorption of economic shocks  Economical method of financingEconomical method of financing  Aid in smooth and undisturbed running of businessAid in smooth and undisturbed running of business  Helps to follow stable dividend policyHelps to follow stable dividend policy  Flexible financial structureFlexible financial structure  Makes co. self dependentMakes co. self dependent  Enables to redeem long term liabilitiesEnables to redeem long term liabilities
  19. 19. AdvantagesAdvantages  To shareholdersTo shareholders 1.1. Increase in value of shareIncrease in value of share 2.2. Safety of investmentSafety of investment 3.3. Enhanced earning capacityEnhanced earning capacity 4.4. No dilution of controlNo dilution of control 5.5. Evasion of super taxEvasion of super tax  To societyTo society 1.1. Increased rate of capital formationIncreased rate of capital formation 2.2. Stimulates industrializationStimulates industrialization 3.3. Increased productivityIncreased productivity 4.4. Decrease the rate of industrial failureDecrease the rate of industrial failure 5.5. Higher standard of livingHigher standard of living
  20. 20. DisadvantagesDisadvantages  Over capitalizationOver capitalization  Creation of monopolyCreation of monopoly  Deprive the freedom of investorsDeprive the freedom of investors  Misuse of retained earningsMisuse of retained earnings  Dissatisfaction among share holdersDissatisfaction among share holders
  21. 21. (b)(b) DepreciationDepreciation (c)(c) Working CapitalWorking Capital (d)(d) Sale of assetsSale of assets
  22. 22. MEDIUM TERM FINANCINGMEDIUM TERM FINANCING 1.1. Public depositPublic deposit 2. Term loan ( from commercial banks2. Term loan ( from commercial banks 3. Hire purchase3. Hire purchase 4. Lease financing4. Lease financing
  23. 23. SHORT TERM FINANCINGSHORT TERM FINANCING 1.1. Trade CreditTrade Credit 2.2. Customer AdvancesCustomer Advances 3.3. AccrualsAccruals 4.4. Deferred IncomesDeferred Incomes 5.5. Installment CreditInstallment Credit 6.6. Credit cardsCredit cards 7.7. Bill financingBill financing 8.8. Inter corporate depositsInter corporate deposits 9.9. COMMERCIAL PAPERsCOMMERCIAL PAPERs
  24. 24. 10. BANK FINANCING10. BANK FINANCING  OverdraftOverdraft  Clean overdraftClean overdraft  LoansLoans  Cash creditCash credit  Advance against goodsAdvance against goods 11.11. BRIDGE FINANCINGBRIDGE FINANCING
  25. 25. SHORT NOTE:SHORT NOTE: SEED CAPITALSEED CAPITAL

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