sources of finance
Long term source: EPDT
• Equity shares- Share capital of co. is divided into smaller
units of equal value called shares.
• Equity shares basic
features-no preferential rights in payments of divided & refund of capital.
Preference share
Preference share: Preference
share have preference in payment of capital and dividend.
The
basic feature are Claim on income, Claim
on assets, No controlling power.
Debenture
• Originated from Latin word -
Debere which means taking loan.
Debenture = Acknowledgement of debt issued
under common seal setting forth term under which they are issued & to be
paid.
• The Important Features are:
Acknowledgement of Debt, Refund of Debt, Claim on Income, Claim on
Assets.
Term Loans–Features
• A loan from a bank for a specific amount that has a specified
repayment schedule and a floating interest rate.
• Term loans usually last between one and ten years, but may last
as long as 30 years in some cases.
• Maturity
• Direct Negotiations
• Security
• Repayment Schedule
Short term source: TABFC
• Trade Credit
• Accrued Expenses and Deferred Income
• Bank Borrowings
• Factoring of receivables
• Commercial Paper
Trade Credit and Credit Terms
• Trade credit is the credit extended by one trader to another
for the purchase of goods and services.
• Trade credit facilitates the purchase of supplies without
immediate payment. Trade credit is commonly used by business organizations as a
source of short-term financing. It is granted to those customers who have
reasonable amount of financial standing and goodwill.
• An informal arrangement, granted on an open account basis,
not formally acknowledge as a debt.
• Trade credit may also take the form of bills payable.
• Credit Terms refers to the conditions of due date and
cash discount.
Benefits
- Easy
Availability.
- Flexibility.
- Informality.
ACCRUED EXPENSES AND DEFERRED INCOME
Accrued Expenses
• Accrued expenses represent a liability that a firm has to pay
for the services which it has already received.
1. Accrued Wages and Salaries.
2. Accrued taxes and Interest.
Deferred Income
• Deferred income represents funds received by the firm for goods
and services which it has agreed to supply in future.
1. Advance Payments.
Bank Borrowing
• Overdraft
• Purchase or Discounting of Bills
• Working Capital Loan
Factoring
• Regular flow of working capital is needed for smooth
functioning.
• Purchaser often delays their payment resulting blockage in
working capital.
• So Expediting the collection of account receivables could
alleviate the difficulties.
• The word factor is derived from Latin word factor which means
to Make or to do or get things done.
• In simple words factor is an agent who does things for his
client for consideration called Commission.
• Therefore Factoring is a financial service designed to
arrange payment of receivable in a
better manner.
Main function of factoring is realization of credit sales.
• Once sale of transaction
is completed between buyer & sellers.
• Seller/Enter agreement with factor where by factor will provide
facility of debt collection.
• Invoice is send to factor generally 80% of invoice value is
given as advance by factor. Rest 20% is paid against the realization.
• Factor collects service charges and discount charge (comparable
to Bank interest rate) from seller.
• Factor provides periodic statement.
Benefits :IILSC
• Immediate cash flow
• Invoice Processing
• Less Cost
• Source of Finance
• Credit Screening
Commercial Paper
• For many corporations, borrowing short-term money from banks is
often a laborious and annoying task. The desire to avoid banks as much as
possible has led to the widespread popularity of commercial paper.
• Commercial paper is an unsecured, short-term loan issued by a
corporation, typically for financing account receivable and inventories.
• Unsecured promissory notes with a fixed maturity of one to
270 days; usually sold at a discount from face value.
• It is usually issued at a discount, reflecting current market
interest rates.
• Maturities on commercial paper are usually no longer than nine
months, with maturities of between one and two months being the average.
• For the most part, commercial paper is a very safe investment
because the financial situation of a company can easily be predicted over a few
months. Furthermore, typically only companies with high credit ratings, and credit worthiness issue
commercial paper.
.jpg)
.jpg)
.jpg)
.jpg)
