sources of finance ,long term finance ,short term finance

1. SOURCES OF FINANCE

2. SOURCES OF FINANCE
 Finance is defined as the provision of
money at time when it is required. Without
adequate finances, no enterprise can
possibly accomplish its objectives.

3. SOURCES OF FINANCE
Long term Medium term Short term
Issue of shares Issue of debentures Bank Credit
Issue of debentures Issue of preference shares Customers- advanc
Ploughing-back Bank loan Instalment credit
of profits Public deposits Trade credit
Loans from Loan from financial - Factoring
Financial institutions institution Accruals
Term loan Commercial- Paper

4. EQUITY SHARES
 Equity shares, also known as ordinary
shares or common shares, represent the
owners, capital in a company .
Characteristics of Equity Share
 Permanent capital
 Residual claim to asset & income
 Right to control or voting rights
 Limited liability
 Pre-emptive Rights

5. Advantages to investor
 In case of profit equity shareholders are
the real gainers.
 Real owners of the company who have
the voting rights and controlling power.
 Capital appreciation.

6. Disadvantage to investor
 No guarantee, regularity of receipt of
dividend.
 No guarantee of receipt of principal
amount.
 Investors who desire to invest in safe
securities with a fixed income have no
attraction for such shares.

7. Advantages to company
 It is permanent, long term source of
finance.
 There is no repayment of liability.
 It does not create any obligation to pay
dividend.
 This capital can be issued without
creating any charge over assets of the
company.

8. Disadvantage to company
 Issue of additional shares dilutes control.
1. Earnings Dilution
2. Ownership Dilution
 No tax advantage (dividends are not tax
deductible)
 It make capital structure rigid.
 Cost
 Risk

9. PREFERENCE SHARES
Preference share capital gives certain
privileges to its holders on the equity
shareholders.
 A preferential privilege in payment of a
fixed dividend.
 Preferential right as to repayment of
capital in case of liquidation.

10. Types of Preference shares
 Cumulative preference shares
 Non-cumulative preference share
 Redeemable Preference share
 Irredeemable Preference Share
 Participating Preference share
 Non-participating preference share
 Convertible preference share
 Non-convertible preference shares.

11. Features of preference shares
 These are generally irredeemable so
permanent
 Prior claim on income and asset over
equity share.
 No control or voting rights.
 Hybrid form of security .

12. Advantages to investor
 Stable rate of preference divided.
 Prior claim on assets.
 Less risk when compared to equity
share holders.

13. Disadvantages to investor
 Limited return
 The rate of preference dividend is
generally less than the rate of dividend
on equity shares.
 No voting rights.

14. Advantages to company
 There is no legal obligation to pay
preference dividend.
 No dilution of controlling power.
 Long term capital to the company.

15. Disadvantages to company
 Preference dividend is not tax deductible.
 Permanent burden in case of cumulative
preference share.
 Expensive sources of finance as
compared to debt.

16. DEBENTURES
A debenture is an acknowledgement of debt .
Types of debenture
 Simple or unsecured debentures
 Secured or mortgaged debentures
 Bearer debentures
 Registered debentures
 Redeemable debentures
 Irredeemable debentures
 Convertible debentures
 Non-Convertible debentures
 Guaranteed debentures .

17. Features of debentures
 Maturity after a specific period
 Fixed rate of interest
 Priority of claims on asset and income
 No controlling power

18. Advantages to investor
 Fixed amount of income
 Comparatively safer investment
 Definite maturity period

19. Disadvantage to investor
 No voting rights
 Only creditors and not the owner of the
company
 No controlling power .

20. Advantages to company
 Long-term funds to a company
 Rate of interest is usually, lower
 No dilution of control
 Fixed rate of interest irrespective of the
increase in profit.

21. Disadvantages to company
 Fixed interest charge
 Charge on the assets of the company
 A company whose expected future
earnings are not stable cannot use this
source.

22. Term Loans
Term loans represent long-term debt with a
maturity of more than one year .
Features of term loans:
 Fixed maturity period
 Term loans are secured
 Restrictive covenants
 Convertibility.

23. Distinction between shares and
Debentures
Share
 A Share is a part of owned Capital.
 Dividend on Shares,
 Voting right is there
 Not redeemable (except redeemable
preference share)

24. Debenture
 A debenture is an acknowledgement of a
debt.
 Interest on debentures is fixed rate of
interest Irrespective of profit or loss.
 No voting rights.
 Redeemed after a certain Period.

25. Bonds
 Bond – debt instrument issued by a business
which obligates it to make periodic interest
payments to the holder of the bond, as well
as to repay the principal of the bond at the
maturity day;
 The issuer obtains funds by placement of
bonds in the capital market, i.e. they are sold
to the economic subjects that invest their
funds to purchase these securities.
 The process of the issue is similar to that
one of the shares.

26. Characteristics of bonds
 Nominal value (face value)
 Quotation
 Interest payment
 Bond duration
 Yield upon investment
 Yield to maturity (YTM)

27. Factors important for investors
 Price of bond – in secondary market may be
significantly different than the nominal value
(bond return, average rate of return of
comparable investment opportunities, life of
bond, relation market supply-demand)
 Risk of bond – depends on how is the issue
secured and on creditworthiness of the
issuer (not secured and secured bonds)

28. Factors important for investors
 Return of bond – depending on
determination of the coupon rate – different
types of bonds
 Date and form of payment – maturity 5 – 30
years; can be repaid by one balloon
payment, by periodical payments; - some
bonds may have a call feature – allows the
firm to call or retire the bond earlier than on
maturity date
 Bond liquidity – ability to trade bonds
efficiently without causing any major
changes in their price with minimum cost

29. Classification of bonds
Bonds can be categorized according to several
criteria. The most often used – according to the type
of issuing company:
 treasury bonds
 municipal bonds
 bank mortgage bonds
 corporate bonds
 fixed coupon rates
 floating rate bond
 hybrid rate bond
 zero-coupon bond

30. Sources of Short term
Financing
 The major accrual items are wages and
taxes. These are simply what the firm owes
to its employees and to the government.
Accruals vary almost spontaneously with the
level of activity of the firm
 Trade credit represents the credit extended
by the suppliers of gods and services. It is a
very important source of financing. The cost
of trade credit depends on the terms of credit
offered by the supplier. When the supplier
offers discount for prompt payment, trade
credit availed beyond the discount period is
quite costly.

31.  Working capital advance by commercial
banks represents often the most important
source for financing current assets. It is
provided in different ways: (i) cash
credits/overdrafts, (ii) discount of bills.

32.  Many firms, large and small, have
received deposits from the public. The
maximum maturity period allowed for
public deposits is three years for
manufacturing companies and five years
for finance companies.
 A deposit made by one company, with
another, normally for a period up to six
months is referred to as an inter-corporate
deposit.

33.  Two newly emerging sources of short-
term financing are: commercial paper
and factoring.
 Commercial paper represents short-term
unsecured promissory note issued by
firms, which enjoy a fairly high credit
rating.
 Factoring involves sale of accounts
receivable to a factor who charges a
commission on it.