The document discusses various sources of finance for new businesses, including owner's funds, friends and family, bank loans, overdrafts, initial public offerings, retained profits, business angels, venture capitalists, government grants and loans, Islamic finance instruments, and how much capital is needed for non-current and current assets. It provides details on the advantages and disadvantages of different sources of finance like bank loans, overdrafts, leasing, hire purchase, and retained profits. It also discusses factors to consider when determining how much capital is required at different stages of a business.

1. Ways of Raising Finance

2. Formation and initial growth (Pranav)
• Refers to the stage where a person finalizes a business idea, after
thorough market research and analysis
• Now, the challenge is to find and seek the right source of finance
for the new business, keeping in mind:
 Profit potential of business: high potential – higher debt is
feasible
 Duration of loans: to avoid asset-liability mismatch, choosing
between short duration (bank overdraft) and long duration
(debentures)
 Market environment: macro-economic status of the country,
liquidity, repo rates
• After initial growth, promoter may have to change source of
finance from debt to equity, as he may go in for Initial Public
Offering (IPO) to list on the stock market exchanges

3. • Owner’s funds: promoter uses own
funds derived from savings or personal
loans
• Friends and family: may be willing to
invest in the promoter’s business, due
to their trust and confidence in the
promoter’s ability to start and run a
successful business
Key point: If the company is not yet incorporated, the
distinction between owners’ capital and owners’
loans is irrelevant

4. Bank loans (Roopshree)
Bank loans are one of the most common
forms of finance for small and medium-sized
enterprises (SMEs).
Bank loans are frequently used to finance
start-up capital and also for larger, long-term
purchases.

5. Advantages:
Suitable for medium- and long-term borrowing needs.
Repayment holidays may be available.
This type of borrowing usually has a lower rate of interest than more
flexible (ie short-term) options.
Disadvantages:
Not as flexible as short-term solutions.
Not ideal for cases where it is difficult to assess the amount of
funding needed.
The lender may not grant the entire amount requested.

6. Overdraft
An overdraft is a facility that can be part of the current
account of a business.
Business overdrafts are a very common way of financing
small and medium-sized enterprises (SMEs), and are ideal
for those with fluctuating finance requirements. They are
either provided over a fixed period of time or as a rolling
facility with no end date.

7. Advantages:
Suitable for short-term borrowing needs.
Generally easy and quick to arrange.
There is usually no charge for clearing the overdraft earlier
than expected.
Disadvantages:
Interest charged is not predictable.
Overdrafts are repayable on demand.
The lender may not grant the entire amount requested.

8. {

9.  An initial public offering is the first occasion on which shares are offered to
the public. A company seeking a listing has to issue a prospectus, which is a
legal document describing the shares being offered for sale, and including
matters such as a description of the company's business, recent financial
statements, details of the directors and their remuneration.
 Shares can be listed via:
- An offer for sale at fixed price: a company offers shares for sale at a fixed
price directly to the public, for example in newspaper advertisements. In fact, the
shares are usually first sold to an issuing house which sells them on to the public.
- An offer for sale by tender: investors are asked to bid, and all who bid more
than the minimum price that all shares can be sold at will be sold shares at that
minimum price.
- A placing: shares are offered to a selection of institutional investors.
Because less publicity is needed, these are cheaper than offers for sale and are therefore
suited to smaller IPOs.
- An introduction: this is rare and only happens when shares are already
widely held publically. No money is raised.

10.  Subsequent issues of equity will be rights issues where existing shareholders are
offered new shares in proportion to existing holdings. The shares are offered at below
their current market value to make the offer look attractive, but in theory, no matter at
what price right issues are made and no matter whether shareholders take up or
dispose of their rights, shareholders will end up neither better nor worse off. Wealth is
neither created nor destroyed just by moving money from a shareholder’s bank
account to the company’s.
 Gaining a listing opens up a huge source of potential new capital. However,
with listing come increased scrutiny, comment and responsibility. Although this
will help the standing and respectability of the company the founders of the
company, having been used to running their own company in their own way,
often resent outside interference – even though that is to be expected now that
ownership of their shares is more widespread.

11. LEASING AND HIRE PURCHASE
(Kavya)• In financial terms, leasing is very like a bank loan. Instead of receiving cash from the
loan, spending it on buying an asset and then repaying the loan, the leasing company
buys the asset, makes it available to the lessee and charges the lessee a monthly
amount.
• Hire purchase is a type of instalment credit under
which the hire purchaser, called the hirer, agrees
to take the goods on hire at a stated rental, which
is inclusive of the repayment of principal as well
as interest, with an option to purchase.

12. Transfer of ownership
In Hire purchase, the agreement is
entered for the transfer of
ownership after a fixed period. But
in Leasing it is only in financial
lease, the ownership will get
transferred. While in operating
lease, the ownership is not
transferred.
Agreement type
Hire purchase is a tripartite
agreement involving the seller,
finance company and the
purchaser / hirer whereas Leasing
is only a bipartite agreement,
involving lessor and lessee.
Depreciation Claim
Depreciation is claimed by the
purchaser / hirer in a hire
purchase. But in leasing,
Depreciation is claimed by the
lessor in the lease agreement.

13. GOVERNMENT
GRANTS (Femi)
A government grant is a financial award given by the
federal, state, or local government authority for a beneficial
project of some sort. It is effectively a gift: It does not
include technical assistance or other financial assistance,
such as a loan or loan guarantee, an interest rate subsidy,
direct appropriation, or revenue sharing. The grantee is not
expected to repay the money.

14. GOVERNTMENT LOAN
A government-backed loan is a loan subsidized by the
government, also known as a Federal Direct Loan, which
protects lenders against defaults on payments, thus
making it a lot easier for lenders to offer potential
borrowers lower interest rates. Its primary aim is to make
home ownership affordable to lower income households
and first-time buyers.
There are numerous types of government-backed loans,
which vary dependent on the country and status of the
borrower. Arguably, the most widely known type of
government-backed loan is the US Federal Housing
Administration FHA loan, in existence since 1934.

15. GOVERNMENT
GUARANTEE
Government Guarantee means an Acceptable
Guarantee (or other guarantee, undertaking of support
or similar document acceptable to the Lenders in their
sole discretion) from the national government, or
department or division of government authorised to
bind the applicable state, of the State of Registration or
State of Incorporation of the Portfolio Lessee.

18. Business Angels
Business angels are individuals, often successful business people,
who are using their own funds to invest in businesses they like
Business angels help to plug the ‘equity gap’ that many small
businesses experience, which falls between the equity that the
owners are able to raise themselves and the minimum level of
equity investment that private equity firms are normally
prepared to consider.
Business angels tend to invest in early-stage businesses but may
also invest in more mature businesses, such as those seeking
finance for expansion, management buyouts, or business turn
around.
Business angels are an informal source of finance and are not
encumbered by bureaucracy
better scrutiny and monitoring of investments
shared search and transaction costs
access to knowledge and expertise of others within the syndicate.

19. Venture Capitalists
Venture capitalists (VC) manage the pooled money of others in a professionally-
managed fund.
VC comprise a group of professional investors. Their capital will come from
individuals, corporations, pension funds and foundations. These investors are
known as limited partners
 They seek to target firms that are at the stage where they are looking to
commercialize their idea. The VC fund will buy a stake in these firms, nurture
their growth and look to cash out with a substantial Return on Equity (ROI)

20. ADVANTAGES
Opportunity for expansion
of the company
Expertise knowledge and
skills
Help in building network
and communications.
No obligation to
repayment
VC are trustworthy and
easy to locate
DISADVANTAGES
Dilution of ownership and
control
Early Redemption by VC’s
VC’s take long time to decide
Approaching a VC can be
tedious
May require high return on
investment
May release the funds from
time to time
May lead to under valuation.

21. Retained Profits (Marcia)
Retained earnings (RE) is the amount of net
income left over for the business after it has
paid out dividends to its shareholders.Often
this profit is paid out to shareholders, but it
can also be re-invested back into the company
for growth purposes. The money not paid to
shareholders counts as retained earnings.

22.  Whenever a company generates surplus income, a portion of the long-term shareholders
may expect some regular income in the form of dividends as a reward for putting their
money in the company. Traders who look for short-term gains may also prefer getting
dividend payments that offer instant gains.
 Dividends are also preferred as many jurisdictions allow dividends as tax-free income,
while gains on stocks are subject to taxes. On the other hand, company management
may believe that they can better utilize the money if it is retained within the company.

23. KEY TAKEAWAYS
 Retained earnings (RE) is the amount of net income left
over for the business after it has paid out dividends to its
shareholders.
 The decision to retain the earnings or to distribute it
among the shareholders is usually left to the company
management.
 A growth-focused company may not pay dividends at
all or pay very small amounts, as it may prefer to use the
retained earnings to finance expansion activities.

24. Using Retained Earnings
 The income money can be distributed (fully or partially) among the
business owners (shareholders) in the form of dividends.
 It can be invested to expand the existing business operations, like
increasing the production capacity of the existing products or hiring
more sales representatives.
 It can be invested to launch a new product/variant, like a refrigerator
maker foraying into producing air conditioners, or a chocolate cookie
manufacturer launching orange- or pineapple-flavoured variants.
 The money can be utilized for any possible mergers ,acquisitions or
partnership that leads to improved business prospects.
 It can also be used for share buybacks.
 The earnings can be used to repay any outstanding loan (debt) the
business may have.

25. LIMITATIONS OF RETAINED EARNINGS
 As an analyst, the absolute figure of retained earnings during a
particular quarter or year may not provide any meaningful insight,
and its observation over a period of time (like over five years) may
only indicate the trend about how much money a company is
retaining.
 As an investor, one would like to infer much more — such as how
much returns the retained earnings have generated and if they
were better than any alternative investments.

26. ISLAMIC FINANCE
MAIN
PRINCIPLES
•Wealth must be generated from legitimate trade and asset
based investments
•Investments should also have a social and an ethical benefit
to wider society beyond pure return
•Risk should be shared
•All haram activities should be avoided

27. MURABAHA- is a
form of trade credit
for asset acquisition
that avoids the
payment of interest.
IJARA- is a lease
finance arrangement
whereby the bank
buys an item for a
customer and then
leases it back over a
specific period at an
agreed amount
MURDARABA- Is
essentially equity
finance in which
bank and the
customer share any
profits
MUSHARAKA- is a
joint venture or
investment
partnership between
two parties
SUKUK- is debt
finance. A
conventional, non
Islamic loan note is
a simple debt and
the debt holders
return for providing
capital to the bond
issuer takes the
form of interest.
THE DIFFERENT KINDS OF ISLAMIC FINANCIAL
INSTRUMENTS

28. How much Capital is needed? (Julisha and
Reja)
 For investment in Non-current Assets
 To sustain the company through initial
loss-making periods
 For investment in Current Assets

29. When capital is raised, the
company has to decide what to do
with it, and there are two main
uses :
 Invest in Non-current Assets
The more the capital invested, the greater the profit
earning potential of the business. However, leaving
too cash in Current Assets will lead to liquidity
problems.
 Invest in Current Assets
Leaving too much cash to raise capital in current
assets is wasteful. Investors wants higher returns
from the company.

30. Long, Medium and Short-term
Capital
 Short term
- upto two years
- eg: trade credit, invoice discounting, overdrafts
 Medium term
- two to five or six years
- eg: term loans, lease finance
 Long term
- over five years, or so, to permanent

31.  For financing :
I. Premises, plant and machinery – consider equity
capital, bonds (larger companies0, term loans (atleast of
five years)
II. Equipment, motor vehicles – consider equity
capital, bonds (larger companies), term loans around five
years, leasing and hire purchase.
III. Inventory, receivables – equity capital, bonds
(larger companies), term loans, overdrafts, factoring and
invoice discounting, trade credit.

32. Short-term Capital comes to an end quickly
and if finance is still needed then more has
to be renegotiated so it can be used to fund
seasonal peaks.
Long-term Capital is either permanent or
comes up for renewal relatively rarely so it
can be used to fund all classes of asset.

33. Thank You
17SJCCC101 – Julisha Magdalene D
17SJCCC104 - Sanjana J
17SJCCC107 - Femi Rappai
17SJCCC111 – Pranav R Joshi
17SJCCC113 - Roopshree K
17SJCCC149 - Maneesha
17SJCCC150 - Marcia V Anand
17SJCCC158 - Reja John
17SJCCC163 - Riya Roy
17SJCCC166 - S N Kavya