2. • The sources of funds refer to the mediums by which an organization
raises its long-term capital and working capital. The organization can
select any of the sources of funds depending upon the need and
gestation period of the project to be financed.
• There are Two Main types of Sources of Funds:
1) Short Term Sources of Funds
2) Long Term Sources of Funds
Sources of Funds
4. Long Term Sources of Financing
• Long-term finance can be defined as any financial instrument with
maturity exceeding one year (such as bank loans, bonds, leasing and
other forms of debt finance), and public and private equity
instruments.
• IT is a Backbone of the Financial Strength of a Business Activity.
• Long Term Sources are Required to Purchase of Fixed Assets such as
Plant, Machinery, Furniture and fixture etc.
5. Types of Long Term Sources of Funding
Shares Debentures Term Loans
Lease
Financing
Venture
Capital
6. 1) Equity Shares
• Equity Shares are also termed as Ordinary shares or Common shares.
• Equity share holders are considered as Owners of The Company as
they have Invested in the Company.
• Equity Share Holders get Dividend based on the Performance of the
Company.
• Holders of this Shares are the last one to get their money back in the
case of Liquidation of the Company.
7. Features of Equity shares
Owned Capital
Fixed or Nominal Value
Distinctive Number
Attached Rights
Return of Shares
Transfer of Shares
Benefit of Bonus Shares
Irredeemable
Risk by Nature
8. Advantages of Equity Share Capital
High Demand in case of Profit
Interest in Company Activities
Best form of Investment
Right to interfere in Management
No Fixed Dividend
No Outflow of Cash
Bear the Risk
Availability of Fixed Capital
9. Disadvantages of Equity Shares
Uncertainty of Income
Irregular Income
Capital Loss
Not the Best Alternative
Difficult to Remove Over Capitalization
Centralization of Control
Change in Management Policy
11. 2) Preference Shares
• Preferred stock is a form of stock which may have any combination of
features not possessed by common stock including properties of both
an equity and a debt instrument, and is generally considered a hybrid
instrument.
• They have Certain Features of Equity and at the Same time Certain
Features of Debentures.
12. Features of Preference Shares
Convertibility
Redeemability
Participating Preference Shares
Voting Power
Low Risk by Nature
Priority in all Financial Decisions
13. Advantages of Preference Shares
Repayment of Capital
Best Security
Regular and Fixed Income
Safety of Interest
Independent Management
Economical Financing
Availability of Hugh Market
14. Disadvantages of Preference Shares
Fixed Rate of Dividends
Limited Voting Rights
Disadvantage to Equity Share holders
Fixed Financial Burden
Higher Tax on Dividend Payment
15. 3) Debentures
• Debenture is used to issue the loan by government and companies.
• The loan is issued at the fixed interest depending upon the
reputation of the companies. When companies need to borrow some
money to expand themselves they take the help of debentures.
• Interest of Fixed Rate is Paid to the Debenture Holders by Respective
Entity.
17. Advantages of Debentures
Fixed and Stable Income
Lower Rate of Interest
Lower Interest Payable compared to Equity Shares
Tax Benefits
Controlling Over Capitalization
Safe Investment
Fixed Maturity Period
Convertibility to Shares
18. Disadvantages of Debentures
Fixed Charge on Assets
Fixed Burden
Risk of Winding up
No Control over Management
No Extra Profits
Uncertainty
19. 4) Term Loans
• A term loan is a monetary loan that is repaid in regular payments over
a set period of time.
• Term loans usually last between one and ten years, but may last as
long as 30 years in some cases.
• A term loan usually involves an unfixed interest rate that will add
additional balance to be repaid.
20. Features of Term Loans
Security
Payment of Instalments
Restrictive Covenants
Maturity Period
Borrowed on Assets
Interest
21. Advantages and Disadvantages of Term Loans
Advantages
Lower Tax
Avoidance of the Lost of Control
Fixed Rate of Interest
Maturity Period
Secured on Assets
Protected by clauses
Disadvantages
Payment is Obligatory in Nature
Appointment of nominee in Board
Financial Risk in case of Failure of Payment
No Voting Rights for Lender
22. 5) Lease Financing
• Lease financing is a contractual agreement between the owner of the
assets (lessor) and user of the assets (lessee), whereby the owner
permits the user to economically use the asset on the payment of
periodical amount which is in the form of lease rent for a specific
period of time. The title of goods remains with the owner (lessor) of
the asset.
• It is the most important source of long term financing.
23. Advantages and Disadvantages of Lease
Financing
Advantages
Financing of Capital Goods
Less Expensive
Ownership Protected
Flexibility in Rental Structure
Simplicity
Tax Benefits
Disadvantages
Interest
Total Cost is Higher
Rigidity of Payments
Rigidity of Agreement
24. 6) Venture Capital
• It is a private or institutional investment made into early-stage / start-
up companies (new ventures).
• As defined, ventures involve risk (having uncertain outcome) in the
expectation of a sizeable gain.
• Venture Capital is money invested in businesses that are small; or
exist only as an initiative, but have huge potential to grow. The people
who invest this money are called venture capitalists (VCs).
• The venture capital investment is made when a venture capitalist
buys shares of such a company and becomes a financial partner in the
business.
25. Features of Venture Capital
New Venture
Continuous Involvement
Mode of Investment
Objective
Hands on Approach
High Rick-Return Ventures
Liquidity
26. Advantages and Disadvantages of Venture
Capital
Advantages
Provide large sum of Equity
No Obligation of Repayment
Helpful in building Connection
Opportunity of Expansion
Valuable Guidance and Expertise
Disadvantages
Dilution of Ownership and Control
Tedious Process
May Require high interest on Investment
May Lead to Undervaluation