Sources of Finance

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

1. Easy Availability.
2. Flexibility.
3. 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.