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Sources of Finance

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Almost half of all newventures fail becauseof poor financialmanagement

-Dun & Brandstreet

Why do we need to studyfinance?

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hat is Finance!

ho needs mone"!#ver" one! "ou!

$an "ou or a businesssurvive without cash! h"!So what is Finance!

First% how to have mone"

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(ersonal finance

here does mone" for individuals)personal finance* come from+

,ur own mone" in poc etBorrows+ from friends or credit cards.eceived from /overnment if entitled tosome benefits

#arned b" doing something or sales ofproducts and services

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Business finance

Business finance+ a business has the same source ofmone" for individuals

ts own mone"Borrows+ from friends% colleagues% ban s and lendinginstitutions.eceived from /overnment grants #g new indeprived sectors#arned b" sales of products and servicesFrom venture capitalists )see ing profit for sparefunds*

From private individuals )Business Angels oftenseen in entertainment sector*(rivate companies4icroloans

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6o obtain funding for a business

pro7ectDetermine how much mone" is needed tostart "our compan"(rove to "our investor that "our compan"re8uires the predetermined amount ofmone"

,ffer incentives% interest% or collateral forthe investor9s contribution4a e arrangements to pa" bac the loan

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Business /rowth

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Sources of finance

Based on period

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Based on period

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Based on period

Short 6erm Ban credit,verdraft facilities$ustomer Advances6rade credit

Factoring

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Based on ownership

,wnership source,rdinar" Shares.etained earningSurplus and profits

Borrowed $apitalDebentureBond(ublic deposits

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Based on source of generation

nternal source.etained earningSurplus and profits

Deprecation funds

#=ternal source,rdinar" SharesDebentureBond(ublic deposits

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Based in mode of finance

Securit" Finance,rdinar" SharesDebenture

.etained earning.etained earningDeprecation funds

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Sources of Finance Definitions

,rdinar" SharesCommon stock is a form of corporate e8uit" ownership% a t"pe of securit" 6he terms @votingshare@ or @ordinar" share@ are also used fre8uentl"in other parts of the world @common stoc @ beingprimaril" used in the nited States

(reference SharesPreferred stock )also called preferred shares %preference shares or simpl" preferreds * is a t"peof stoc which ma" have an" combination of featuresnot possessed b" common stoc including propertiesof both an e8uit" and a debt instrument% and isgenerall" considered a h"brid instrument

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Debenturesn corporate finance % a debenture is a medium- to

long-term debt instrument used b" large companiesto borrow mone"% at a fi=ed rate of interest

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Short 6erm Ban credit

6he borrowing capacit" provided to an individual b" the ban ing s"stem% in the form of credit or a loan 6he total ban credit theindividual has is the sum of the borrowing capacit" each lender ban provides to the individual

,verdraft facilitiesA credit agreement made with a financial institution that permits an account holder to use or withdraw more than the" have intheir account % without e=ceeding a specified ma=imum negativebalance #stablishing an overdraft facilit" with a ban can helpan individual or small business with short term cash flowproblems% although the negative balance t"picall" needs to berepaid within a month

Sources of Finance Definitions

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Short 6erm $ustomer Advances

A liabilit" account used to record an amountreceived from a customer before a service hasbeen provided or before goods have beenshipped

6rade creditAn agreement where a customer can purchase

goods on account )without pa"ing cash*% pa"ingthe supplier at a later date

Sources of Finance Definitions

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Factoring

Factoring is a financial transaction whereb" a business sellsits accounts receivable )i e % invoices* to a third part" )calleda factor* at a discount in e=change for immediate mone"Factoring allows compan" to raise finance based on the value

of "our outstanding invoices $ompan" pa"s factoring feesPublic deposits

6he term Cpublic depositC implies an" mone" received b" acompan" through the deposits or loans collected from thepublic 6he public includes the general public% emplo"ees andshareholders of the compan" but e=cludes the mone"received in the form of shares and debentures

Sources of Finance Definitions

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LEASING is a contract between the leasing compan"% the lessor% and thecustomer )the lessee* 6he leasing compan" bu"s and owns theasset that the lessee re8uires 6he customer hires the asset fromthe leasing compan" and pa"s rental over a pre-determinedperiod for the use of the asset 6here are two t"pes of leases+

1 Finance LeasesAn agreement where the lessor receives lease pa"ments to cover itsownership costs 6he lessee is responsible for maintenance% insurance%and ta=es Some finance leases are conditional sales or hire purchaseagreements! "perating Leases6he lease will not run for the full life of the asset and the lessee will notbe liable for its full value 6he lessor or the original manufacturer orsupplier will assume the residual ris 6his t"pe of lease is normall" onl"used when the asset has a probable resale value% for instance% aircraft orvehicles

Sources of Finance Definitions

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#one$ #arket InstrumentsA segment of the financial mar et in which financial

instruments with high li8uidit" and ver" short maturities aretraded

4one" mar et securities consist ofnegotiable certificates of deposit )$Ds* A $D bears a maturit"

date% a specified fi=ed interest rate and can be issued in an"denomination

ban ersC acceptance )BA* is a short-term credit investmentcreated b" a non-financial firm and guaranteed b" a ban toma e pa"ment

6reasur" bills% commercial paper% municipal notes% federal fundsand repurchase agreements )repos*

Sources of Finance Definitions

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%etained Earnings.etained earnings are another method of internal sources of

finance Actuall" is not a method of raising finance% but it is called asaccumulation of profits b" a compan" for its e=pansion and

diversification activities&epreciation Funds

t is one ind of provision of fund% which is needed to reduce theta= burden and overall profitabilit" of the compan"

Sources of Finance Definitions

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4a7or categories of sources of Finance

Securit" Financenternal Finance

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Securit" Finance

f the finance is mobili ed through issue ofsecurities such as shares and debenture% it is calledas securit" finance

Characters of Securit$ FinanceSecurit" finance consists of the following important

characters+

1

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Securit" Finance

'$pes of Securit$ Finance

Securit" finance ma" be divided into two ma7or t"pes+1 ,wnership securities or capital stoc2 $reditor ship securities or debt capital

"(nership Securities6he ownership securities also called as capital stoc % is commonl"called as shares Shares are the most niversal method of raisingfinance for the business concern ,wnership capital consists of the

following t"pes of securitiesE E)uit$ Shares* Preference Shares* No par stock* &eferred Shares

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Securit" Finance

Features of E)uit$ Shares1 4aturit" of the shares

2 .esidual claim on income3 .esidual claims on assets' .ight to control0 oting rights5 (re-emptive right:

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Securit" Finance

Ad+antages of E)uit$ Shares1, Permanent sources of finance!, -oting rights., No fi/ed di+idend0, Less cost of capital

, %etained earnings

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Securit" Finance

&isad+antages of E)uit$ Shares1, Irredeemable!, "bstacles in management., Leads to speculation0, Limited income to in+estor

, No trading on e)uit$

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Securit" Finance

P%EFE%ENCE S2A%ESClassification of P%EFE%ENCE S2A%ES

1, Cumulati+e preference shares!, Non3cumulati+e preference shares., %edeemable preference shares0, Participating Preference Shares

, Non3Participating Preference Shares4, Con+ertible Preference Shares5, Non3con+ertible Preference Shares

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Securit" Finance

Features of Preference Shares1, #aturit$ period!, %esidual claims on income., %esidual claims on assets0, Control of #anagement

, -oting right

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Securit" Finance

Ad+antages of Preference Shares1, Fi/ed di+idend!, Cumulati+e di+idends., %edemption0, Participation

, Con+ertibilit$

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Securit" Finance

&isad+antages of Preference Shares

1, E/pensi+e sources of finance

!, No +oting right., Fi/ed di+idend onl$0, Permanent burden

, 'a/ation

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Securit" Finance

&ebenturesA Debenture is a document issued b" thecompan" t is a certificate issued b" thecompan" under its seal ac nowledging adebt

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Securit" Finance

'$pes of &ebentures1 nsecured debentures2 Secured debentures3 .edeemable debentures' rredeemable debentures0 $onvertible debentures

Gon-convertible debenturesFull" convertible debentures(artl" convertible debentures

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Securit" Finance

Features of &ebentures 1, #aturit$ period!, %esidual claims on income., %esidual claims on assets0, -oting right

, Fi/ed rate of interest

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Securit" Finance

Ad+antages of &ebenture1, Long3term sources!, Fi/ed rate of interest., 'rade on e)uit$0, Income ta/ deduction

, Protection

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Securit" Finance

&isad+antages of &ebenture1, Fi/ed rate of interest!, No +oting rights., Creditors of the compan$0, 2igh risk

, %estrictions of further issues

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nternal Finance

A new compan" ma" not raise internal sources offinance and the" can raise finance onl" e=ternalsources such as shares% debentures and loans butan e=isting compan" can raise both internal ande=ternal sources of finance for their financialre8uirements

nternal source of finance ma" be broadl" classifiedinto two categories+

A, &epreciation Funds6, %etained earnings

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%etained Earnings.etained earnings are another method of internal sources of

finance Actuall" is not a method of raising finance% but it is called asaccumulation of profits b" a compan" for its e=pansion and

diversification activities&epreciation Funds

t is one ind of provision of fund% which is needed to reduce theta= burden and overall profitabilit" of the compan"

nternal Finance

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nternal Finance

Ad+antages of %etained Earnings1, 7seful for e/pansion and di+ersification!, Economical sources of finance., No fi/ed obligation0, Fle/ible sources

, Increase the share +alue4, A+oid e/cessi+e ta/5, Increase earning capacit$

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nternal Finance

&isad+antages of %etained Earnings

1 4isuses

2

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An" Huestion!!!!!!