All the information about the companies source of fund.

1. 𝑺𝒐𝒖𝒓𝒄𝒆 𝒐𝒇 𝑭𝒖𝒏𝒅𝒔
Sharavan Aravind Kumar G
14PGM40

2. Financial Management
-Sources of Funds
 The need for funds:
No business can live without funds. Throughout the life of a
business, money is needed continuously. Firms raise money
mainly to meet the following three types of need:
• To start a business as initial expenditure;
• To fund continuous business activities and money flowing;
• To expand the business.

3. • Debt and Equity Capital: Two Basic Sources
of Funds

4. Financial Management
-External Long-term Sources of Funds
Share capital:
The most important source of funds for a limited company. It is often considered as
permanent capital as it is not repaid by the business, but the shareholder can have a share
in the profit, called dividend.
Three types of shares are:
• Ordinary shares: The most common types of shares, and the most riskiest shares since
no guaranteed dividend. Dividend depends on how much profit is made by the firm. But
all ordinary shareholders have voting rights.
• Preference shares: The share owners receive a fixed rate of return. They carry less risk
because shareholders are entitled to the dividend before the ordinary shares. But they
are not strictly owners of the company.
• Deferred shares: These shares are often held by the founders of the company. Deferred
shareholders only receive the dividend after the ordinary shareholders have been paid.

5. • private equity is an asset class consisting of equity securities and debt in
operating companies that are not publicly traded on a stock exchange.
A private equity investment will generally be made by a private
equity firm, a venture capital firm or an angel investor.
• FII The term is used most commonly in India to refer to outside companies
investing in the financial markets of India. International institutional
investors must register with the Securities and Exchange Board of India to
participate in the market. One of the major market regulations pertaining
to FIIs involves placing limits on FII ownership in Indian companies.

6. Ordinary Share
• Voting Ordinary Shares: These ordinary shareholders will have the right to vote.
Therefore the voting ordinary shareholders will control the company.
• Non Voting Ordinary Shares: Companies may issue non voting ordinary shares so
that the control within the company will not be loss and these shareholders will
take the same level of risk but they will not have the right to vote.
• Differed Ordinary Shares: This is the special type of ordinary share issue by the
company where the company will have a condition under which the differed
ordinary shares will be paid a dividend only if the other ordinary shareholders are
paid a dividend more than a specified amount.

7. Preference Stock
• Preferred stocks, also known as preferred shares, are equity securities that get preferential
treatment over common shares. These shares can be considered hybrid securities because
they also show characteristics similar to bonds.
• Cumulative Stocks :This type of preferred stock comes with a provision stipulating that if
dividends have been skipped or omitted in the past, the holder will receive accumulated
dividends in arrears.
• Non-Cumulative Stocks : All preferred shares that are not cumulative are called non-
cumulative, or straight. In essence, holders of straight preferred stocks cannot expect to
receive any payout for missed or omitted dividends.
• Callable or Redeemable : this kind of preferred stock comes with a provision that gives the
issuing company the right to call or redeem the share at a certain price, which will usually be
higher than market value. Callable preferred stocks are not very popular with investors
because of the risks that they carry. If prevailing interest rates are significantly lower due to
financial conditions, calling such shares can lead to a lot of savings for the issuer, but huge
losses for the investors.
• Convertible Preferred Shares : This type of preferred stock can be exchanged or converted to
a predetermined number of the issuer’s common shares after a specified date or period.

8. Financial Management
-External Long-term Sources of Funds
Types of loan capital:
• Debentures: The holder of a debenture is a creditor of the company, not an owner.
Holders are paid with an agreed fixed rate of return, but having no voting rights.
The amount of money borrowed must be repaid by the expiry date.
• Mortgage: These are long-term bank loans (usually over one year period) from
banks or other financial institutions. The borrower’s land or property must be used
as a security on such as a loan.
• Loan specialists’ funds: These are venture capitalists or specialists who provide
funds for small businesses, especially for high tech investment projects in their
start-up stage. There are also individuals who invest in such businesses, which are
often called ‘business angels’.
• Government assistance: To encourage small businesses and high employment,
governments may be involved in providing finance for businesses. In the USA,
there is an organization which is called the Small Business Administration (SBA).
SBA provides guarantees for small businesses’ loans and they even offer some
loans themselves.

9. • Comparison of Debt and Equity Capital

10. Debt or Equity Financing
• Debt financing - Obtaining borrowed funds for
the company.
– Asset-based financing; requires some asset to be
used as a collateral.
– Borrowed funds plus interest need to be paid back.
• Equity financing - Obtaining funds for the
company in exchange for ownership.
– Does not require collateral.
– Offers investor some form of ownership position.

11. • Factors affecting type of financing:
– Availability of funds.
– Assets of the venture.
– Prevailing interest rates.
– All financing requires some level of equity; amount
will vary by nature and size of venture.
Debt or Equity Financing

12. Financial Management
-External Short-term Sources of Funds
Definition:
Short term sources of funds are usually the funds which
are less than one year for maturity. They are less stable sources
of funds for businesses.
Types:
The main types of external short term sources of funds include:
• Bank overdraft
• Bank loan
• Leasing
• Credit card
• Trade credit
See the next page for details:

13. Internal or External Funds
• Internally generated funds are most frequently
employed; sources include:
– Profits.
– Sale of assets and little-used assets.
– Working capital reduction.
– Accounts receivable.
• Short-term internal source of funds:
– Reducing short-term assets - inventory, cash, and
other working-capital items.
– Extended payment terms from suppliers.

14. • Criteria for evaluating external sources of
funds:
– Length of time the funds are available.
– Costs involved.
– Amount of company control lost.
Internal or External Funds (cont.)

15. Commercial Banks
• Types of Bank Loans (Asset based)
– Accounts receivable loans.
– Inventory loans.
– Equipment loans.
– Real-estate loans.
• Cash flow financing (Conventional bank loans)
– Installment loans.
– Straight commercial loans.
– Long-term loans.
– Character loans.

16. Other Sources
• American Depository Receipts (ADRs) - Foreign
corporations may choose to "list" their shares on U.S. stock
exchanges by issuing ADR.
• Right - Also known as subscription rights, these privileges
grant to existing shareholders the right to subscribe to
shares of a new offering of common stock before they are
offered to the public and at a lower subscription price.
• Hedge funds are aggressive portfolios designed to both
maximize returns while minimizing risks. They are available
only to large sophisticated investors and are therefore
unregulated.

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