This presentation speaks about different sources for the procurement of funds for new ventures.

1. SOURCES
OF
FINANCE
DR. RICHA SINGHAL
ASSOCIATE PROFESSOR
DEPTT. OF EAFM
S.S.JAIN SUBODH PG COLLEGE

2. SOURCES OF FINANCE
For a businessperson or entrepreneurs to find the sources of
business finance is the most important aspect when starting a
business or a new venture. It needs the maximum effort and
dedication. The sources from which business enterprise can
meet its financial requirements can be classified on various
basis such as period for which funds are required (i.e. long
term, medium term or short term), the ownership of capital (i.e.
owned or borrowed funds); and the sources of generating funds
(i.e. internal or external sources).
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3. (1) Long term Finance : Long term finance is required for permanent
investment in business. It may be raised for a period of more than
seven years. It is required for investment in fixed assets like land and
buildings, plant and machinery, furniture and fixtures etc.
(2) Medium Term Finance : Medium term finance is required for a term
ranging from more than one year and up to 3 to 6 years. It is required for
modernization of plant and machinery, repayment of debts, payments of
deferred revenue expenses.
(3) Short term Funds : These funds are required for a short period. These
funds are due for repayment within one year usually within the operating
period. Short term funds are required for meeting day to day working
capital needs.
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4. LONG TERM SOURCES OF FINANCE
• Share capital
• Retained Earnings or Internal Accruals
• Debenture/ Bonds
• Term Loans from Financial Institutions, Government and Commercial
Banks
• Venture Capital
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5. SHARE CAPITAL
• The person holding a share is known as a shareholder. He receives
dividend from the company as a consideration for investing his money
into the company. Under the existing provisions of sec. 86 of the
Companies Act, only two types of shares may be issued :
• (a) Equity Shares
• (b) Preference Shares.
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6. EQUITY SHARES
• Real Ownership
• Long-term and Permanent Capital
• Without any security to the investors
• No Fixed Rate of Dividend
• Risk free Source
• Risky for Investors
• voting rights of the investors
• Participation in Management
• Costly Source
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7. PREFERENCE SHARES
According to sec. 85 of the companies Act, a preference share is one which
carries the following two rights :
(i) a right to receive dividend at as stipulated rate before any dividend Is
paid on equity shares.
(ii) a right to receive repayment of capital on winding up of the company,
before the capital of equity shareholders is returned.
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8. BASIC CLASSIFICATION OF PREFERENCE SHARES
(i) Cumulative preference shares
(ii) Non-cumulative preference shares
(iii) Participating preference shares
(iv) Non-participating preference shares
(v) Convertible preference shares
(vi) Non-convertible preference shares
(vii) Redeemable preference shares
(viii) Irredeemable preference shares
(ix) Cumulative Convertible preference shares
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9. CHARACTERISTICS OF PREFERENCE SHARES
• (i) Ownership
• (ii) Repayment
• (iii) Unsecured
• (iv) Rate of Dividend
• (v) Risky for Company
• (vi) Less Risky for Investors
• (vii) Voting Rights
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10. RETAINED EARNINGS OR INTERNAL ACCRUALS
Retained earnings are the profits which are not distributed year after year. Re-
investment of profits in the business is known as ploughing back of profits. If a
company follows a regular policy of ploughing back of profits the shareholders
may resist to this policy. As such while deciding the policy of retained
earnings, the company has to be careful about the consequences on the
expectations of shareholders.
Cost free source
Control
Legal formalities
Capital Formation
Redemption of Debts
 Strong Financial Position
Increases Market Value
Safety of investment
Indication of Growth
Dividend Policy
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11. DEBENTURES
Debentures is a document given by a company as evidence of a debt to the holder
usually arising out of a loan and most commonly secured by charge.
The following are the main characteristics of debentures :
Creditors of the Company
Redemption
Secured
Interest
Risky for Company
Less Risky for Investors
Participation in Management
Cheaper Source
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12. BASIC CLASSIFICATION OF DEBENTURES
1. According to Ownership
(i) Registered Debentures
(ii) Bearer Debentures
2. According to Security
(i) Secured Debentures
(ii) Unsecured Debentures
3. According to Redemption
(i) Redeemable Debentures
(ii) Irredeemable Debentures
4. According to Convertibility
(i) Convertible Debentures
(ii) Non-convertible Debentures
5. According to Priority
(i) First Debentures
(ii) Second Debentures, etc.
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13. DIFFERENCE BETWEEN SHARES AND DEBENTURES
SHARES
• OWNER’S CAPITAL (OWNERS)
• ENJOYS VOTING RIGHT
• PAID DIVIDEND
• NOT SECURED
• NOT CONVERTIBLE INTO DEBENTURES
• CAN BE FORTEITED
• REFUND PAID IN THE LAST
• RIGHT TO ATTEND MEETINGS
• NO ISSUE OF SHARES AT DISCOUNT
• NOT REDEEMABLE (EXCEPT REDEEMABLE PREF.
SHARES)
DEBENTURES
• LOAN (CREDITORS)
• NO VOTING RIGHT
• PAID INTEREST
• SECURED
• CONVERTIBLE INTO SHARES
• CANNOT BE FORTEITED
• REFUND PAID PRIOR
• NO RIGHT TO ATTEND MEETINGS
• NO RESTRICTION ON ISSUE AT DISCOUNT
• REDEEMABLE
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14. TERM LOANS
• Term loan is a short-term or long-term loan approved and disbursed by any financial
institution. The offered loan amount shall be repaid in regular payments, such as Equated
Monthly Instalments (EMIs) over a defined period of time. Term loans can be offered in both
fixed and floating rate of interest. The repayment tenure of a term loan for business
loan for business purposes is usually between 12 months to 60 months. Term loans are
offered among various lending products that include business loan, personal loan, home
loan, education loan, auto loan and gold loan.
• Term loans can be used for various business purposes, such as for business expansion, to
purchase equipment, machinery or raw materials, to manage cash flow, to meet working
capital requirements, buying office or business space/land, paying-off rent and salaries,
hiring new staff, debt consolidation, etc.
• From Financial Institutions, Government and Commercial Banks
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15. CHARACTERISTICS OF TERM LOAN:
Creditors
Repayment
Secured or Unsecured
Interest
Risky for company
Control
Cheaper Source
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16. VENTURE CAPITAL
• 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.
• Venture Capital investment is also referred to risk capital or patient
risk capital, as it includes the risk of losing the money
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17. CHARACTERISTICS OF VENTURE CAPITAL:
• Equity instruments
• Amount of Risk
• New products in anticipation of higher returns.
• Active participation in the management.
• Longer gestation period
• Regular Monitor
• Not permanent basis
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18. SHORT TERM SOURCES OF FINANCE
PUBLIC DEPOSITS
TRADE CREDIT
OPEN ACCOUNT
BILL OF EXCHANGE
PROMISSORY NOTES
ACCURED EXPENSES
ADVANCE FROM CUSTOMERS
COMMERCIAL PAPERS
COMMERCIAL BANKS
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19. PUBLIC DEPOSITS
• Business Enterprise directly from public
• 6months to 3 years (Short and Medium)
• Different rates of Interest
• No issue Expenses
• Unsecured
• Safe Investment
• No Interference
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20. CHARACTERISTICS OF TRADE CREDIT
• Sellers to the Buyers
• Not available in cash
• No interest but Forgo cash discount
• No Security
• No formalities
• Bad Debts
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21. BASIC CLASSIFICATION OF TRADE CREDIT
• OPEN ACCOUNT
• BILL OF EXCHANGE
• PROMISSORY NOTES
• ACCURED EXPENSES
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22. COMMERCIAL PAPERS
• Unsecured money market instrument
• Introduced in India in 1990.
• Governed by guidelines of FIMMDA in consolation with RBI.(Fixed
Income Money Market and Derivations)
• Can be issued by Corporates, Primary Dealers and All-India FIs.
• Maximum amount is Rs. 5lakhs.
• Maturity Period- 7days to 1 year.
• Can be issued in the form of promissory note or in a dematerialised
form.
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23. COMMERCIAL BANKS-
Overdraft
Cash credit
Discounting of Bills
Ordinary loans
ADVANCE FROM CUSTOMERS-
Received advance before supplying goods or services.
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24. THANKS
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