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Sources of finance

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Sources of finance

  1. 1. 1
  2. 2. IntroductionIt is rightly said that finance is the life-blood ofbusiness.No Business can be carried on without source offinance. There are several sources of Finance and as such thefinance has to be raised from the right kind of source.
  3. 3. Sources Of Finance Security Internal Loan Financing Financing Financing Equity Shares Short- Retained Earnings TermPreference Shares Long- Depreciation Term FundDebentures
  4. 4. Long Term Source of Finance• Long term sources of finance are those that are needed over a longer period of time - generally over a year.• Long term finance may be needed to fund expansion projects• Its Types Are:-Share,Debenture,Venture Capital, Government Grant, Bank LoanMortgage, Owner Capital, Internal Accrual.
  5. 5. Need for long term Finance• Long term vs. short term(working capital) funds requirements• For modernization, expansion, diversification; huge quantities reqd., irreversible decision• Asset-liability mismatch, interest rate risk, liquidity risk.
  6. 6. Equity Share Capital Preference Share CapitalAuthorized, Issued, Is a hybrid form of financing,Subscribed and Paid up capital payment after debt but before equityPar/face value, Issue Price,Book value and Market Value Equity features: out of distributable profits not an obligatory paymentRights of equity shareholders dividends not tax deductibleRight to Income :PAT less Debt features:preferred dividends dividend rate is fixed capital is redeemableRight to Control: voting no right to voterights
  7. 7. DEBENTURES• Just like shares, DEBENTURES are also instruments for raising long term finance• “Debenture is a document that either creates a debt or acknowledges it, & is a debt without collateral”• Attributes:-  Interest rates  Convertibility  Security  Redemption  Credit rating & Trustee  Debenture redemption reserve
  8. 8. Term Loan• Term loan also known as term finance is loan made by a bank/financial institution to a business having an initial maturity of more than 1 yr and generally repayable in less than 10 yrs.• Features of Term Loans• Maturity• Negotiated• Security• Covenants – Negative & Positive• Repayment Schedule/Loan Amortization
  9. 9. • Evaluation – Low Cost & High Risk• Term Loan Procedure• Project Appraisal• Market Appraisal• Technical Appraisal• Financial Appraisal• Managerial Appraisal
  10. 10. Securitization Process Credit Contracts Obligors Ongoing cash flows Enhancement Initial cash flows Providers Collections Credit enhancementOriginal Issue of securitiesLoan Cash flows Servicing Collection SPV of securities Investors Sale of Agent asset Rating Subscription to securities Originator Rating Agency Structurer
  11. 11. Leasing vs. Hire Purchase Leasing Hire-Purchase•Ownership not transferred to buyer •Ownership transferred to hirer on payment of all installments•Depreciation benefit to lessor •Depreciation shield available to•Magnitude of funds high, for big hirerticket items •Maybe for smaller value capital goods•No margin money/down paymentrequired •Some down payment required•Maintenance of asset by lessor inoperating lease •Maintenance cost borne by hirer
  12. 12. Other Sources Of Long Term Finance• Initial Public Offer (IPO)• Securitization• Government Subsidies/Grant• Supplier’s Credit• Private Placement• Venture Capital/ Private Equity• Bank Loan• Mortgage
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