Project work on:Sources Of Finance

Submitted By :Sanchita Gupta & Damanpreet Kaur B.COM-III Roll No:- 4593 & 4595

Finance is the life blood of Business

According to period
Sources Of Finance
Short-Term
Medium-Term

Long-Term

Short- term finances

 Bank loans necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most  Overdraft facilities the right to be able to withdraw funds you do not currently have Provides flexibility for a firm Interest only paid on the amount overdrawn Overdraft limit the maximum amount allowed to be drawn - the firm does not have to use all of this limit  Trade credit Careful management of trade credit can help ease cash flow usually between 28 and 90 days to pay  Factoring the sale of debt to a specialist firm who secures payment and charges a commission for the service.  Leasing provides the opportunity to secure the use of capital without ownership effectively a hire agreement

Medium-term finances
Medium term loans: repayment perhaps linked to projected earnings. Instalment credit: deals like consumers H.P. Mortgage debentures: secured on particular assets. Venture Capital: Merchant banks & others will assist new business. Leasing: usually for up to five years.

Long- term Finances

Purpose of long term finance :To finance fixed assets. To finance the permanent part of working capital. To finance the growth and expansion of a business.

Factors determining long term sources of finance:Nature of goods produced Nature of business Technology used

Equity Capital

Preference Capital

Sources of Long term Finance

Term Loans

Internal Accruals

Debentures

Equity capital
Terms Authorized,issued,subscribed & Paid-up Capital. Par/face value,Issue price,book value,market value.

Rights of equity shareholders

Right to income Right to control Pre-emptive right Right in liquidation

Equity capital
Advantages Disadvantages

No fixed maturity, no obligation to redeem

Dilution of Control

No compulsion to pay dividends

Issue costs higher

Provides leverage capacity

Dividends are not cost deductible , hence cost is higher

Dividends tax exempt for investors

High serving costs

Preference capital
Hybrid form of financing Equity features: - Out of distributable profits - Dividends not tax deductible - Priority over equity shares in case of bankruptcy Debenture features: -Dividend rate is fixed -Capital is redeemable -Normally no right to vote

Advantages

Disadvantages

No obligation to pay dividend, no bankruptcy or legal action for non payment.

Expensive source since dividends not tax deductible

Financial distress of redemption obligation not very high Part of networth, hence increases is creditworthiness

Though no legal consequences,liability to pay dividends stands,can spoil company s image

Can acquire voting rights in some cases Have claim prior to equity holders

No dilution of control, no pledging of assets required

Internal Accurals

Retained Earnings

Depreciation

Internal Accruals
Advantages Disadvantages

Readily available

Quantum very limited

Effective additional equity capital

High opportunity costs, dividends forgone by equity holders

 Maturities  Security  Provided by foreign institutes/bank  Repayment schedule  Restrictive covenants  Convertibility

Term loans

Term Loans
Advantages Disadvantages

Interest on debt is tax deductible

Fixed Obligation for interest and principal

Debt contracts impose restrictions on firm s financial and operational flexibility

No dilution of Control

Interest cost is fixed

Dividends are not tax deductible: hence cost is higher Increases financial leverage, excess raises cost of equity in the firm

Dividends Tax exempt for investors

Debentures
INTEREST SECURITY MATURITY & REDEMPTION OPTIONS CONVERTIBILITY

Few types of Debenture

Non-convertible debentures. Fully convertible debentures. Partly- convertible debentures.

Debentures
Advantages Disadvantages

Low cost

Obligatory payments

No ownership Dilution

Financial risk

Fixed Payment of Interest

Cash outflow

Reduced real obligation

Restricted Covenants

Other important sources of finance: Venture capital  Seed capital  Bridge finance  Lease financing

Venture capital
 Equity participation  Long term investment  Participation in management

Process of venture capital financing

Deal Organisation Screening Evaluation Deal structuring Post investment activity Exist Plan

Seed capital
Seed capital is another important source of finance which fulfills the need of many entrepreneurs who are technically qualified but lack financial capability of providing required amount of contribution at the time of financing a project.

BRIDGE FINANCE
Bridge financing can be defined as the term loans provided by the commercial banks in order to avoid the delays such as the procedural formalities for the creation of mortgage etc. which occurs during the implementation of business projects.

Lease financing
Lease financing is an arrangement that provides a firm with the use and control over assets without buying and owning the same. It is a form of renting assets.

Conclusion
During the research of this assignment,I have drawn a conclusion that Many type of finance can be used at one particular time. Depending on the type of company and they should try to get the best possible financial deal. To save the borrower on the risk of borrowing high amount and also to pay high amount on the interest rate.