sources of funds

1. Ms. Shagun Chahal
Assistant Professor
SGT University

2. SHORT TERM FUNDS
•Indigenous Banker
•Trade Credit
•Credit Installement
•Advances
•Factoring
•Accrued Expenses
•Deffered Income
•Commercial Paper
•Commercial Bank
•Public Deposits

3. 1. Indigenous Bankers:
They are private firms or individuals who operate as banks and as such both
receive deposits and give loans. They raise a part of loanable funds from the
public in deposits. They provide hundis , commercial billsetc.
2. Trade Credit:
Trade credit refers to the credit extended by the suppliers of goods inthe
normal course of business. The credit-worthiness of a firm and the
confidence of its suppliers are the main basis of securing tradecredit.
It is mostly granted on an open account basis whereby supplier sends
goods to the buyer for the payment to be received in future as per termsof
the sales invoice.
When a firm delays the payment beyond the due date as per the terms of
sales invoice, it is called stretching accounts payable.Afirm may generate
additional short-term finances by stretching accounts payable, but it may
have to pay penal interest charges as well as to forgo cashdiscount.

4. 3. Installment Credit
This is another method by which the assets are purchased and the possession
of goods is taken immediately but the payment is made in Installment over a
pre-determined period of time. Generally, interest is charged on the unpaid
price or it may be adjusted in the price.
But, in any case, it provides funds for sometimes and is used as a sourceof
short-term working capital by many business houses which have difficult
funds position.
4. Advances:
Some business houses get advances from their customers and agents against
orders and this source is a short-term source of finance for them. It is acheap
source of finance and in order to minimise their investment in working
capital, some firms having long production cycle, especially the firms
manufacturing industrial products prefer to take advance from their
customers.

5. 5. Factoring:
Another method of raising short-term finance is through account receivable
credit offered by commercial banks and factors. A commercial bank may
provide finance by discounting the bills or invoices of its customers. Thus,a
firm gets immediate payment for sales made on credit.
A factor is a financial institution which offers services relating to
management and financing of debts arising out of credit sales. Factoring is
becoming popular all over the world on account of various services offered
by the institutions engaged in it.
Factors render services varying from bill discounting facilities offeredby
commercial banks to a total take-over of administration of credit sales
including maintenance of sales ledger, collection of accounts receivables,
credit control and protection from bad debts, provision of finance and
rendering of advisory services to their clients.
Factoring may be on a recourse basis, where the risk of bad debts is borne by
the client, or on a non-recourse basis, where the risk of credit is borne by the
factor.

6. 6. Accrued Expenses:
Accrued expenses are the expenses which have been incurred but not yet
due and hence not yet paid also. These simply represent a liability that afirm
has to pay for the services already received by it. The most important items
of accruals are wages and salaries, interest, and taxes.
In the same manner, accrued interest and taxes also constitute a short-term
source of finance. Taxes are paid after collection and in the intervening
period serve as a good source of finance. Even income-tax is paid
periodically much after the profits have been earned. Like taxes, interest is
also paid periodically while the funds are used continuously by a firm.Thus,
all accrued expenses can be used as a source of finance.
The payment period of wages and salaries is determined by provisions of
law and practice in industry. Similarly, the payment dates of taxes are
governed by law and delays may attract penalties. Thus, we may conclude
that frequency and magnitude of accruals is beyond the control of
managements.

7. 7. Deferred Incomes:
Deferred incomes are incomes received in advance before supplying goodsor
services. They represent funds received by a firm for which it has to supply
goods or services in future. These funds increase the liquidity of a firm and
constitute an important source of short-termfinance.
However, firms having great demand for its products and services, and those
having good reputation in the market can demand deferred incomes.
8. Commercial Paper:
Commercial paper represents unsecured promissory notes issued by firms to
raise short-term funds. But only large companies enjoying high credit rating and
sound financial health can issue commercial paper to raise short-term funds.The
Reserve Bank of India has laid down a number of conditions of determine
eligibility of a company for the issue of commercial paper.
Only a company which is listed on the stock exchange has a net worth of at least
Rs. 10 crores and a maximum permissible bank finance of Rs. 25 crores can
issue commercial paper not exceeding 30 per cent of its working capitallimit.
The maturity period of commercial paper, in India, mostly ranges from 91 to 180
days.

8. 9. Commercial Banks:
Commercial banks are the most important source of short-term capital.The
major portion of working capital loans are provided by commercial banks.
The different forms in which the banks normally provide loans and
advances are as follows:
(a) Loans
(b) Cash Credits
(c) Overdrafts, and
(d) Purchasing and discounting of bills.
10. Public Deposits:
Acceptance of fixed deposits from the public by all type of manufacturing and
non-bank financial companies in the private sector has been a unique featureof
Indian financial system.
The manifold increase in demand for public deposits from the corporate sectorin
India has been on account of restrictive credit policy of the Govt. of India and a
substantial credit gap existing in the market.
As a result, companies have been accepting deposits directly from the public by
offering higher rates of interest as compared to banks and post offices to meettheir
requirements of funds. But even by offering higher rates of interest to the
investors, the cost of funds raised through public deposits to the companies has
been lower than the minimum rate of interest on bank advances.

9. Equity Shares
Preference Shares
Debentures
Warrants

10. Equity Shares
Equity share is a main source of finance for any company giving investorsrights
to vote, share profits and claim on assets. The value of equity shares are
expressed in terms of face value or par value, issue price, book value, market
value etc
AUTHORIZED SHARE CAPITAL
It is the maximum amount of capital which can be issued by a company. Some fee is
required to be paid to legal bodies accompanied with some formalities.
ISSUED SHARE CAPITAL
It is that part of authorized capital which is offered toinvestors.
SUBSCRIBED SHARE CAPITAL
It is that part of Issued capital which is accepted and agreed by theinvestor.
PAID UP CAPITAL
It is the part of subscribed capital, the amount of which is paid by the investor.
Conceptually, paid up capital is the amount of money which is actually investedin
the business.

11. There are other types of equity shares discussed below:
RIGHT SHARES
These are the shares issued to the existing shareholders of a company. Suchkind
of shares is issued to protect the ownership rights of theinvestors.
BONUS SHARE
These are the type of shares given by the company to its shareholders asa
dividend.
SWEAT EQUITY SHARES
These shares are issued to exceptional employees or directors of the companyfor
their exceptional job in terms of providing know-how or intellectual property
rights to the company.

12. PREFERENCE SHARES
Preference shares are those shares which carry certain special or priority rights.
Firstly, dividend at a fixed rate is payable on these shares before any dividendis
paid on equity shares. Secondly, at the time of winding up of the company,
capital is repaid to preference shareholders prior to the return of equitycapital.
Preference shares do not carry voting rights. However, holders ofpreference
shares may claim voting rights if the dividends are not paid for two years or
more on cumulative preference shares and three years or more on non-
cumulative preference shares.
TYPES OF PREFERENCE SHARES
CONVERTIBLE AND NON-CONVERTIBLE PREFERENCE SHARES
Convertible preference shares have a similar concept of convertibledebentures.
These shares possess an option or right whereby they can be converted into an
ordinary equity share. at some agreed terms and conditions. Non-convertible
simply does not have this option but has all other normal characteristicsof
a preference shares.

13. REDEEMABLE AND IRREDEEMABLE PREFERENCE SHARES
Redeemable preference share is very commonly seen preference share which has a
maturity date on which date the company will repay the capital amount to the
preference shareholders and discontinue the dividend payment thereon.Irredeemable
preference shares are little different from other types of preference shares. It doesnot
have any maturity date which makes this instrument very similar to equity except
that the dividend of these shares is fixed and they enjoy priority in payment of both
dividend and capital over the equity shares.
PARTICIPATINGAND NON-PARTICIPATING PREFERENCE
SHARES
Participating preference shares are a unique type of preference shares whichhas
an additional benefit of participating in profits of the company apart from the
fixed dividend. The distribution may depend on the terms and conditions
mentioned in the agreement which may vary to some extent from case to case.
CUMULATIVE AND NON-CUMULATIVE PREFERENCE SHARES
If the shares are cumulative preference shares, the dividends are cumulatedand
therefore paid when the company makes the profitWhereas, for non-
cumulative preference shares, a company can skip the dividend in the year, the
company has incurred losses.

14. DEBENTURES
A debenture is one of the capital market instruments which is used to raise
medium or long term funds from public. A debenture is essentially a debt
instrument that acknowledges a loan to the company and is executed under the
common seal of the company. The debenture document, called Debenture deed
contains provisions as to payment, of interest and the repayment of principal
amount and giving a charge on the assets of a such a company, which may give
security for the payment over the some or all the assets of the company.
TYPES OF DEBENTURES
REDEEMABLE AND IRREDEEMABLE (PERPETUAL) DEBENTURES
CONVERTIBLE AND NON-CONVERTIBLE DEBENTURES
FULLYAND PARTLYCONVERTIBLE DEBENTURES
SECURED (MORTGAGE) AND UNSECURED (NAKED) DEBENTURES
FIRST MORTGAGED AND SECOND MORTGAGED DEBENTURES
REGISTERED UNREGISTERED DEBENTURES (BEARER) DEBENTURE
FIXED AND FLOATING RATE DEBENTURES
ZERO COUPON AND SPECIFIC RATE DEBENTURES

15. WARRANT
A certificate, usually issued with a preferred stock, giving the holder the
option of buying an underlying asset, in this case usually more stock, at a
certain strike price. The strike price is usually higher than the marketvalue
of the underlying asset at the time of issue but lower than the expected
market value at some point in thefuture.