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Sources of finance
Introduction:
                     Decide which
                     assets to buy




       To decide                   ...
Parameter for choosing sources of
                   fund
•   Cost of source of fund.
•   Tenure.
•   Leverage planned by ...
Types of finance
Classification according to term
                 finance
• Short term finance.
• Medium term finance.
• Long term finance.
Short Terms Finance
• Short term finance are required primarily to
  meet working capital requirements.
• The focus is on ...
Working
                    Capital
                    finance



Commercial
                                    Trade Cr...
Working Capital Finance By
          Commercial Banks
• Commercial banks grants short terms finance to
  business firms wh...
Trade Credit
• Trade credit represents credit granted by the
  suppliers of goods, etc. as an incident of sale.
Merits    ...
Inter Corporate deposits
• A deposit made by one company to another is
called as inter-corporate deposit.
• It is generall...
Factoring
Factoring is an agreement in which receivable
arising out of sale are sold by a firm (client) to
the factor (a f...
Advantages
• Establish a strong foundation.
• Maximize profitability.
• Capture growth opportunities.
                Disa...
Commercial Paper (CP)
Commercial paper is an unsecured money
market instrument issued in the form of a
promissory note.
Advantages
• High credit ratings
• Flexibility.
• Provides exit options.
                Disadvantages
• Limited applicabi...
Medium Term Finance
Medium term finance is defined as money
 raised for a period for 1 to 5 years.
The medium term funds...
Medium Term Finance

Commercial
  Banks &                              External    Euro &
                 Lease       Hir...
Lease financing


• It is a contract In which the assets is purchased
  initially by the lessor(leasing company) and
  the...
Advantages            &       Disadvantage
 The holder only pays  Commitment to contract
 for use.               for ent...
Hire Purchasing
• Hire purchase transaction, the goods are
  delivered by the owner to another person the
  agreement that...
Advantage                   Disadvantages
• Cheaper than a            • Higher monthly
  (‘unsecured’) personal      payme...
EXTERNAL COMMERCIAL
           BORROWING::--
1. ECB’s refer to commercial loan in the form of bank
     loans, buyers cred...
Euro bonds::--
• Definition of Euro Bond::--
                      “A bond issued in a
  currency other than the currency ...
Advantages
• Increased liquidity of European bond markets.

• Protection from large market shocks and erratic
  market.

•...
Disadvantages
The main disadvantages are :

• Possible free-riding problems.

• Tensions with the no-bailout clause.

• Cr...
Foreign Bonds::--
Definition::--Foreign bonds are the debt
 instruments issued by foreign
 corporation or foreign governm...
Long Term Finance

• Long term finance refer to those requirements
  of funds which are for a period exceeding 5-10
  year...
Share


  Securitization                       Debentures


                     Long
Venture
                     term   ...
SHARES
   A shares indicates a smaller unit into which the
   overall requirement of a company is subdivided.

           ...
DEBENTURES
• It means a document containing
  acknowledgement of indebtedness issued by a
  company and giving an undertak...
NEW DEBT INSTRUMENT
•   Zero interest bond (ZIB)
•   Deep discount bonds (DDB)
•   Junk bonds
•   Convertible debenture
Retained Earnings
• Retained earnings means that part of trading
  profits which is not distributed in the form of
  divid...
Merits & Demerits Of Retained
              Earnings
Merits :-
Ready Availability
Cheaper than External Equity
No Owner...
Global/ American/ Indian
            Depository Receipts
• GDRs :-
  A negotiable certificate held in the bank of one coun...
Venture Capital
• The venture capital financing refers to
  financing & funding of the small scale
  enterprises, high tec...
Securitization
• Securitization is a process in which illiquid
  assets are pooled into marketable securities
  that can b...
Some Important Sources Of Finance
• Seed capital assistance.
• Certificate of deposit.
• Internal cash accrual
Seed capital assistance

• Designed by IDBI.
• 1% service charge for 5 years.
Certificate of deposit

• CD is a document of title similar to a time deposit
  receipt issued by a bank exepct that there...
Internal cash Accruals


• Existing profit making companies which
  undertake an expansion programe may be
  permitted to ...
Example Of Long Term & Short Term
                   Finance
Standard Chartered Bank                     Mahindra Finance
...
Comparison Between both the
                    companies
More hold on the companies proceedings &       Less hold as comp...
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Sources of finance Slide 1 Sources of finance Slide 2 Sources of finance Slide 3 Sources of finance Slide 4 Sources of finance Slide 5 Sources of finance Slide 6 Sources of finance Slide 7 Sources of finance Slide 8 Sources of finance Slide 9 Sources of finance Slide 10 Sources of finance Slide 11 Sources of finance Slide 12 Sources of finance Slide 13 Sources of finance Slide 14 Sources of finance Slide 15 Sources of finance Slide 16 Sources of finance Slide 17 Sources of finance Slide 18 Sources of finance Slide 19 Sources of finance Slide 20 Sources of finance Slide 21 Sources of finance Slide 22 Sources of finance Slide 23 Sources of finance Slide 24 Sources of finance Slide 25 Sources of finance Slide 26 Sources of finance Slide 27 Sources of finance Slide 28 Sources of finance Slide 29 Sources of finance Slide 30 Sources of finance Slide 31 Sources of finance Slide 32 Sources of finance Slide 33 Sources of finance Slide 34 Sources of finance Slide 35 Sources of finance Slide 36 Sources of finance Slide 37 Sources of finance Slide 38 Sources of finance Slide 39 Sources of finance Slide 40 Sources of finance Slide 41
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Finance, meaning, concept and types
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Sources of finance

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OUR GROUP PRESENTATION ON FINANCIAL MANAGEMENT...

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Sources of finance

  1. 1. Sources of finance
  2. 2. Introduction: Decide which assets to buy To decide Determining what is total sources to tap the total Decision investment required for investment. making buying assets. How much working capital required.
  3. 3. Parameter for choosing sources of fund • Cost of source of fund. • Tenure. • Leverage planned by the company. • Financial condition prevalent in the economy. • Risk profile of both the company as well as the industry in which the company operates.
  4. 4. Types of finance
  5. 5. Classification according to term finance • Short term finance. • Medium term finance. • Long term finance.
  6. 6. Short Terms Finance • Short term finance are required primarily to meet working capital requirements. • The focus is on maintaining liquidity at a reasonable cost.
  7. 7. Working Capital finance Commercial Trade Credit Paper Short Term Finance Inter- Factoring Corporate Deposits
  8. 8. Working Capital Finance By Commercial Banks • Commercial banks grants short terms finance to business firms which is known as “Bank Credit”. • Bank Credit may be granted in the following ways:-  Loans  Purchase/ Discounting of bills.  Cash Credit  Over draft
  9. 9. Trade Credit • Trade credit represents credit granted by the suppliers of goods, etc. as an incident of sale. Merits Demerits Credit for the purpose Less flexible of raw material or finished goods. No security No interest payable
  10. 10. Inter Corporate deposits • A deposit made by one company to another is called as inter-corporate deposit. • It is generally for working capital funding & is for period not exceeding six months.
  11. 11. Factoring Factoring is an agreement in which receivable arising out of sale are sold by a firm (client) to the factor (a financial intermediary).
  12. 12. Advantages • Establish a strong foundation. • Maximize profitability. • Capture growth opportunities. Disadvantages • Cost. • Possible harm to customer relation. • Company image distortion.
  13. 13. Commercial Paper (CP) Commercial paper is an unsecured money market instrument issued in the form of a promissory note.
  14. 14. Advantages • High credit ratings • Flexibility. • Provides exit options. Disadvantages • Limited applicability. • Low bank credit limits. • A high degree of control.
  15. 15. Medium Term Finance Medium term finance is defined as money raised for a period for 1 to 5 years. The medium term funds are required by a business mostly for the repaired and modernizing of machinery.
  16. 16. Medium Term Finance Commercial Banks & External Euro & Lease Hire State Commercial Foreign Financing Purchase Financial Borrowings Bonds Institutions
  17. 17. Lease financing • It is a contract In which the assets is purchased initially by the lessor(leasing company) and thereafter leased to the user(leasee company) who pays a specified rent at periodical intervals.
  18. 18. Advantages & Disadvantage  The holder only pays  Commitment to contract for use. for entire valid period.  Better liquidity.  Higher fixed cost per month.  Fixed rate.  More expensive than  Minimal sales risk. purchase.
  19. 19. Hire Purchasing • Hire purchase transaction, the goods are delivered by the owner to another person the agreement that such person pays the agreed amount in the periodical installment.
  20. 20. Advantage Disadvantages • Cheaper than a • Higher monthly (‘unsecured’) personal payment; loan. • relatively quick. • hidden fees • Deposits are lower than with personal loans.
  21. 21. EXTERNAL COMMERCIAL BORROWING::-- 1. ECB’s refer to commercial loan in the form of bank loans, buyers credit, suppliers credit, securitized instruments.(E.g. Floating rates notes and Fixed rates bonds) availed from non-resident lenders with minimum average maturity years. 2. ECBs mean foreign currency loan raised by residents from recognized lenders. Financial leases and Foreign Currency Convertible Bonds are also covered by ECB guidelines.
  22. 22. Euro bonds::-- • Definition of Euro Bond::-- “A bond issued in a currency other than the currency of the country or market in which it is issued.” • Eurobonds are attractive to investors as they have small par values and high liquidity.
  23. 23. Advantages • Increased liquidity of European bond markets. • Protection from large market shocks and erratic market. • Discipline, guaranteed funding for all EMU countries.
  24. 24. Disadvantages The main disadvantages are : • Possible free-riding problems. • Tensions with the no-bailout clause. • Credibility and political viability.
  25. 25. Foreign Bonds::-- Definition::--Foreign bonds are the debt instruments issued by foreign corporation or foreign government. Types::--
  26. 26. Long Term Finance • Long term finance refer to those requirements of funds which are for a period exceeding 5-10 years.
  27. 27. Share Securitization Debentures Long Venture term New Debt Capital finance Instruments Depository Retained Schemes Earnings
  28. 28. SHARES A shares indicates a smaller unit into which the overall requirement of a company is subdivided. TYPES OF SHARES THERE ARE TWO TYPES: Equity shares Preference shares
  29. 29. DEBENTURES • It means a document containing acknowledgement of indebtedness issued by a company and giving an undertaking to repay the debt at a specified date.
  30. 30. NEW DEBT INSTRUMENT • Zero interest bond (ZIB) • Deep discount bonds (DDB) • Junk bonds • Convertible debenture
  31. 31. Retained Earnings • Retained earnings means that part of trading profits which is not distributed in the form of dividends but retained by directors for future expansion of the company.
  32. 32. Merits & Demerits Of Retained Earnings Merits :- Ready Availability Cheaper than External Equity No Ownership Dilution Positive Connotation Demerits :- Limited Finance High Opportunity Cost
  33. 33. Global/ American/ Indian Depository Receipts • GDRs :- A negotiable certificate held in the bank of one country representing no. of shares traded on the exchange of another country. • ADRs :- It allows US investors to buy shares of ADS companies without the cost of investing directly in Foreign Stock Exchange. • IDRs :- It allows foreign companies to raise the funds from Indian markets.
  34. 34. Venture Capital • The venture capital financing refers to financing & funding of the small scale enterprises, high technology & risky volumes.
  35. 35. Securitization • Securitization is a process in which illiquid assets are pooled into marketable securities that can be sold to investors. Advantages Disadvantages Reduces assets liability Cost mismatch Locking in profits Size limitation Liquidity Risk
  36. 36. Some Important Sources Of Finance • Seed capital assistance. • Certificate of deposit. • Internal cash accrual
  37. 37. Seed capital assistance • Designed by IDBI. • 1% service charge for 5 years.
  38. 38. Certificate of deposit • CD is a document of title similar to a time deposit receipt issued by a bank exepct that there is no prescribe interest rate on such funds. • The main advantage of cd is the baker is not required to encash the deposit before maturity period and the investor is assured of liquidity because he can sell the cd in secondary market.
  39. 39. Internal cash Accruals • Existing profit making companies which undertake an expansion programe may be permitted to invest a part of their accumulated reserves or cash profit for creation of capital assets.
  40. 40. Example Of Long Term & Short Term Finance Standard Chartered Bank Mahindra Finance Equity capital = 58% Equity capital = 42% Internal accrual (reserve & surplus) =24% Internal accrual (reserve & surplus) =12% Debentures (bonds) = 20% Debentures (bonds) = 33% Term (long term) = 8% Term (long & short term) = 13%
  41. 41. Comparison Between both the companies More hold on the companies proceedings & Less hold as compare to SCB but have a company is having high goodwill in the good hold and goodwill in the market. market. Company can skip dividends on equity shares Company can skip dividends on equity shares more than Mahindra finance. but less as compared to SCB. The company is having low tax deductible More debentures means more tax deductible income. income. Low debt contract means less restrictions on High debt contract can lead to impose the company. restrictions. Low percentage of term loans means High percentage of term loans means company is having less dependence on the company is having high dependence on the outside sources of finance. outside sources of finance.
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