SOURCES OF FINANCESOURCES OF FINANCE

ACCORDING TO PERIODACCORDING TO PERIOD

ShortTerm

Medium Term

LongTerm

•Trade Credit•Bank financing•Customer Advances•Factoring•Accruals•Deferred Incomes•CPs•Installment Credit•Credit cards•Bill financing•Inter corporate deposits

•Issue of Debentures•Issue of Preference Shares•Bank Loans•Public Deposits/Fixed Deposits•Hire purchase•Lease financing

•Equity financing•Preference shares•Debt financing•Venture capital financing•Internal financing•International financing

According to OwnershipAccording to OwnershipOwned Capital-Owned Capital- Share Capital, Retained Share Capital, Retained

Earnings, Profit Surplus etcEarnings, Profit Surplus etcBorrowed Capital-Borrowed Capital- Debentures, Bonds, Public Debentures, Bonds, Public

Deposit, loansDeposit, loans

According to source of FinanceAccording to source of FinanceExternal-External- Shares, Debentures, Public Deposit, Shares, Debentures, Public Deposit,

loans etc.loans etc.Internal-Internal- Retained Earnings, Profit Surplus Retained Earnings, Profit Surplus

ploughing back of profits, depreciation fund ploughing back of profits, depreciation fund etcetc

LONG TERM FINANCINGLONG TERM FINANCING

11. . Equity Financing or sharesEquity Financing or sharesCharacteristicsCharacteristics1.1. MaturityMaturity2.2. Claims/ Right to IncomeClaims/ Right to Income3.3. Claim on AssetClaim on Asset4.4. Right to control or Voting RightRight to control or Voting Right5.5. Pre-Emptive RightPre-Emptive Right6.6. Limited LiabilityLimited Liability

Advantages & Advantages & DisadvantagesDisadvantages

DisadvantagesDisadvantages

To CompanyTo Company Not to be paid fixed Not to be paid fixed

dividenddividend No charge over asset at No charge over asset at

the time of issuethe time of issue Permanent source of Permanent source of

incomeincome

To share HolderTo share Holder Voting rightVoting right Benefited at the time of Benefited at the time of

high profitshigh profits

To CompanyTo Company If only equity shares If only equity shares

issued co. cannot take issued co. cannot take the advantage of trading the advantage of trading on equityon equity

Can put obstacles in Can put obstacles in managementmanagement

To share HolderTo share Holder Not suitable for one who Not suitable for one who

want fixed income and want fixed income and secured investment secured investment

AdvantagesAdvantages

22 . . Preference Shares:Preference Shares: CharacteristicsCharacteristics1.1. MaturityMaturity

2.2. Claim on IncomeClaim on Income

3.3. Claim on AssetClaim on Asset

4.4. ControlControl

5.5. Hybrid form of InvestmentHybrid form of Investment

6.6. Cumulative dividendsCumulative dividends

7.7. Fixed income securityFixed income security

8.8. Participation featureParticipation feature

9.9. ConvertibilityConvertibility

10.10. Voting rightsVoting rights

11.11. Call and put provisionCall and put provision

12.12. Controlling powerControlling power

TYPES:TYPES: Cumulative Preference SharesCumulative Preference Shares Non CumulativeNon Cumulative RedeemableRedeemable IrredeemableIrredeemable ParticipatingParticipating Non ParticipatingNon Participating ConvertibleConvertible Non ConvertibleNon Convertible Cumulative convertible preference shares (CCP)Cumulative convertible preference shares (CCP)

Advantages (to company)Advantages (to company) No obligation to pay dividendNo obligation to pay dividend Provide long term capitalProvide long term capital No liability to redeem pref. shareNo liability to redeem pref. share Fixed rate of dividend is to be paid so co. can go Fixed rate of dividend is to be paid so co. can go

for trading on equityfor trading on equity No voting rightsNo voting rights No specific asset is pledged for the issueNo specific asset is pledged for the issue

Advantages (to share holder)Advantages (to share holder)Fixed dividendFixed dividendSuperior security over equitySuperior security over equityPreference in payment of dividend, capitalPreference in payment of dividend, capital

Disadvantages (to company)Disadvantages (to company) Expensive source as expected dividend is highExpensive source as expected dividend is high Permanent burden in case of cumulative preference Permanent burden in case of cumulative preference

sharesshares Although no legal obligation to pay dividend but Although no legal obligation to pay dividend but

continuous delay affect creditworthinesscontinuous delay affect creditworthiness Dividend do not save taxDividend do not save tax Some preference sh. Carry voting rights alsoSome preference sh. Carry voting rights also

Disadvantages (to Share holders)Disadvantages (to Share holders)More fluctuations in market price as compared to the More fluctuations in market price as compared to the debenturesdebenturesNo voting rightsNo voting rightsNo charge over assetsNo charge over assets

3. Deferred shares 3. Deferred shares

4. No par stock shares4. No par stock shares

5. Shares with differential Rights5. Shares with differential Rights

6. Sweat Shares6. Sweat Shares

7. Debt financing7. Debt financing(a) Debentures:(a) Debentures: CharacteristicsCharacteristics1.1. MaturityMaturity

2.2. Claim on IncomeClaim on Income

3.3. Claim on AssetClaim on Asset

4.4. Trust deedTrust deed

5.5. Interest rate Interest rate

6.6. RedemptionRedemption

7.7. Debenture redemption reserve (DDR)Debenture redemption reserve (DDR)

8.8. Call & put provisionCall & put provision

9.9. SecuritySecurity

10.10. ConvertibilityConvertibility

11.11. Credit ratingCredit rating

Simple, Naked, Simple, Naked, UnsecuredUnsecured

Secured or Secured or MortgagedMortgaged

BearerBearer RegisteredRegistered RedeemableRedeemable IrredeemableIrredeemable Convertible:Convertible:

FCDFCD

PCDPCD

NCDNCD

Zero interest bonds or Zero interest bonds or debenturesdebentures

First debenture and second First debenture and second debenturedebenture

Guaranteed debenturesGuaranteed debentures Collateral debenturesCollateral debentures Deep discount bonds (DDB)Deep discount bonds (DDB)

Types:

AdvantagesAdvantages To CompanyTo Company1.1. Long term fundsLong term funds2.2. Low rate of interest as compared to dividendLow rate of interest as compared to dividend3.3. No dilution of controlNo dilution of control4.4. Addition of debenture in capital structure increases Addition of debenture in capital structure increases

the EPSthe EPS5.5. Can be redeemed any time with the availability of Can be redeemed any time with the availability of

surplus fundssurplus funds

To share holderTo share holder1.1. Fixed , regular source of incomeFixed , regular source of income2.2. Security of investmentSecurity of investment3.3. Definite maturity periodDefinite maturity period

DisadvantagesDisadvantages

To companyTo company1.1. Fixed interestFixed interest2.2. Charge on assetsCharge on assets3.3. It generally increases the risk on investor thereby It generally increases the risk on investor thereby

increasing the cost of equity capitalincreasing the cost of equity capital4.4. High stamp duty increases the cost of issue High stamp duty increases the cost of issue 5.5. Cannot be used by the company having highly elastic Cannot be used by the company having highly elastic

demand, instable earnings, insufficient fixed assetsdemand, instable earnings, insufficient fixed assets

To ShareholdersTo Shareholders1.1. No voting rightsNo voting rights2.2. Merely creditors not the ownersMerely creditors not the owners3.3. Uncertainty in redemptionUncertainty in redemption

(b) Term loans (from FI)(b) Term loans (from FI)

8. Venture capital financing8. Venture capital financing

9. Internal financing9. Internal financing

NeedNeed1.1. Replacement of fixed assetsReplacement of fixed assets2.2. Expansion plansExpansion plans3.3. Contributing towards fixed or Contributing towards fixed or

working capital requirementsworking capital requirements4.4. Improve efficiency of plant and Improve efficiency of plant and

equipmentsequipments5.5. Redemption of loans etcRedemption of loans etc

(a) Retained earning:(a) Retained earning:

Factors Influencing:

Earning CapacityEarning Capacity Desire and type of shareholdersDesire and type of shareholders Future financial requirementsFuture financial requirements Dividend policyDividend policy Taxation policyTaxation policy

AdvantagesAdvantages

To CompanyTo Company Absorption of economic shocksAbsorption of economic shocks Economical method of financingEconomical method of financing Aid in smooth and undisturbed running of businessAid in smooth and undisturbed running of business Helps to follow stable dividend policyHelps to follow stable dividend policy Flexible financial structureFlexible financial structure Makes co. self dependentMakes co. self dependent Enables to redeem long term liabilitiesEnables to redeem long term liabilities

AdvantagesAdvantages

To shareholdersTo shareholders1.1. Increase in value of shareIncrease in value of share2.2. Safety of investmentSafety of investment3.3. Enhanced earning capacityEnhanced earning capacity4.4. No dilution of controlNo dilution of control5.5. Evasion of super taxEvasion of super tax

To societyTo society1.1. Increased rate of capital formationIncreased rate of capital formation2.2. Stimulates industrialization Stimulates industrialization 3.3. Increased productivityIncreased productivity4.4. Decrease the rate of industrial failureDecrease the rate of industrial failure5.5. Higher standard of livingHigher standard of living

DisadvantagesDisadvantages

Over capitalizationOver capitalization Creation of monopolyCreation of monopoly Deprive the freedom of investorsDeprive the freedom of investors Misuse of retained earningsMisuse of retained earnings Dissatisfaction among share holdersDissatisfaction among share holders

(b)(b) Depreciation Depreciation

(c)(c) Working Capital Working Capital

(d)(d) Sale of assets Sale of assets

MEDIUM TERM FINANCINGMEDIUM TERM FINANCING

1.1. Public depositPublic deposit

2. Term loan ( from commercial banks2. Term loan ( from commercial banks

3. Hire purchase3. Hire purchase

4. Lease financing4. Lease financing

SHORT TERM FINANCINGSHORT TERM FINANCING1.1. Trade CreditTrade Credit

2.2. Customer AdvancesCustomer Advances

3.3. AccrualsAccruals

4.4. Deferred IncomesDeferred Incomes

5.5. Installment CreditInstallment Credit

6.6. Credit cardsCredit cards

7.7. Bill financingBill financing

8.8. Inter corporate depositsInter corporate deposits

9.9. COMMERCIAL PAPERsCOMMERCIAL PAPERs

10. BANK FINANCING10. BANK FINANCING

OverdraftOverdraft Clean overdraftClean overdraft LoansLoans Cash creditCash credit Advance against goodsAdvance against goods

11.11. BRIDGE FINANCING BRIDGE FINANCING

SHORT NOTE:SHORT NOTE:

SEED CAPITALSEED CAPITAL