DIFFERENT SOURCES OF PROJECT FINANCE

PRESENTED BY HIRAN H L FUS 100608 DEPT. OF FUTURES STUDIES UNIVERSITY OF KERALA

SOURCES OF PROJECT FINANCE

There are various sources for financing projects. These are classified broadly as: Short term finance medium term finance & long term finance

Short term finance sources:

The sources of financing which finance the project for a short duration (1-2 years). E.g.: trade credit

Medium term sources:

These are the sources of financing which finance the project for a duration which is neither too short nor too long (3-10 years).

E.g.: Leasing

Long term sources

These are the sources of financing which finance the project for a long duration duration- usually more than 10 years E.g.: mortgage

The major sources of finance are

Owner s capital/savings Overdraft Trade credit Ordinary share capital Hire purchase Venture capital Leasing Bank loans Mortgage Sale of assets Retained profits Debenture
characterized by:    origin liability duration of finance

Owners Savings
When the owner uses his or her own savings to
invest in the business. Usually a sole trader will start up a business with their own savings.

Sale of Assets
When a business sells off fixed and current assets which it no longer needs, in order to raise finance for new projects.

Retained Profit
Profit kept after all expenses and dividends are paid out. The profit left can be ploughed back into the business for expansion purposes. It belongs to the business.

Overdraft
The bank allows a business to go overdrawn up to an agreed amount. The business only pays interest on the amount overdrawn. Amt. of interest paid is usually higher than a bank loan; so caution is needed when using an overdraft. Usually used to pay small bills and expenses.

Trade Credit
When suppliers give time to pay for supplies and stock

usually with a 30 day payment period. This can be difficult for sole traders to acquire in the early days.

Leasing
When an asset is used by a business but is never owned by the business. The business pays a monthly amount to use the asset in return they have access to the latest equipment and support if the asset breaks or needs repair. Many businesses lease cars or computer equipment.

Hire Purchase
When an asset is bought over a period of time with repayments made each month until, the final payment On final payment, the item becomes the property of the firm. This spreads the cost of purchasing assets

Bank Loan
An amount of money is borrowed from the bank and then repaid with interest over a set period of time. The loan period can range from 1 year to 10 year.

Look for the APR amount the higher the APR the more interest is paid.

Debentures (debt capital)

Long term borrowing similar to selling shares, but with the promise of repaying the amount borrowed at a fixed period in time, usually for a set amount of interest. Usually used by large organizations and the debenture is fixed upon a particular asset.

Mortgage
This is a long term loan (usually over 25 years) provided by a bank/building society in order to buy property. Usually secured on the property itself so if repayments are not made the mortgage lender can repossess the property

Venture Capital
Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies (invest in small, risky business) In return the venture capitalist gets some say in the running of the company as well as a share in the profits made business loses some of its independence in decision making.

Ordinary Share (equity) Capital

A share in the business is sold to an individual or another business. This money is then used to purchase new assets or to expand. The business changes from a Ltd to a plc

and shares can be traded on the stock market.

Types of organization & access to the different sources of finance

Larger the organization, the more sources of finance are available.

Financial institutions(Long term)

Insurance companies and pension funds:  prefer Long term investment- liability to policy holders and pensioners  recently, invested in shares of ltd companies  ie, applications for capital from smaller companies are entertained.

Unit trusts:
 Money received from investors is added to a fund invested in securities appropriate to investors.  The fund is divided into units, each representing a share of fund ( open ended )  Specialize in overseas investments and new issues of securities through stock exchange.  Units can be bought and sold through the unit trust managers

OEIC (Open ended investment co.)

 They are open ended funds like unit trusts,  But are corporations rather than trusts.  Issue shares-not units Greater flexibility and wider appeal to investors

Building societies
Lending to individuals to enable them to buy their homes Funds are borrowed on short term from savers and loaned for the long term to borrowers Risk is smoothed by variability of interest rate charged to borrowers Assistance is also given to small businesses to purchase premises

Financial institutions ( short and medium funds)

Commercial banks:
traditionally take short term deposits from their customers and lend short term loans and overdrafts 1/8 th of their total funds is kept in cash or relatively liquid form Now, principal lenders in housing market

Discount houses:
traditional function is to provide short tem finance by discounting bills of exchange but they have extended their activities to include govt. treasury bills,local authority bonds and certificates of deposit.

Merchant banks
These were originally merchants who developed lending businesses Services are extensive include: advice on export financing, foreign exchange dealing corporate financial planning, leasing finance, hire purchase venture and development capital for small business

Foreign Banks
Branches of overseas banks compete with commercial banks in provision with short-medium-term financeParticularly for overseas trade and investment

Finance houses
Deal mainly in hire purchase and lease financing Short term depositers provide most of funds Lends over medium term, risk adjusted on charges

Factoring and invoice discounting companies

 Individual companies( subsidiaries of commercial banks) provide short term finance by purchasing business debts  Factoring companies also offer debtor s ledger management as an additional charge

Leasing companies
 Majority are subsidiaries of commercial banks, merchant banks, finance houses  Some are independent in finance and leasing association  They specialize in lease finance

Reference
Financial management - Geoffrey Knott, 4th edition