LEARNING OBJECTIVES
Various sources of short term and long term finance
Finance by financial institution 2
INTRODUCTION
• It is rightly said that finance is the lifeblood of business. No Business can be carried on without source of finance .
The financial manager is mainly responsible for raising the required finance for the business. There are several sources of Finance and as such the finance has to be raised from the right kind of source.
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SOURCES OF
FINANCE
SPONTANEOUS
SOURCES
NEGOTIATED
SOURCES.
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Cont.
• Spontaneous finance: Finance which naturally arises in the course of business is called as “spontaneous financing.”
Trade creditors, credit from employees, credit from suppliers of services etc are the examples of spontaneous financing. Negotiated financing: Financing which has to be negotiated with lenders, say commercial banks, financial institutions, general public are called as “negotiated financing.”
This financing may be short term in nature or
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long term.
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
• IT’S TYPES ARE:SHARE, GOVERNMENT GRANT, BANK LOAN,
MORTGAGE, OWNER CAPITAL, INTERNAL ACCURAL,
DEBENTURE, VENTURE CAPITAL,
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SHARES
a) Equity share capital: Equity capital represents ownership capital as equity shareholders collectively own the company. They enjoy the rewards and bear the risk of ownership. However unlike the liability of the
Equity share holder is limited to their contribution in the firm.
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Cont’d
ADVANTAGES :-
• Dividend to the equity share holder.
• Maturity date and redemption.
• Tax exempt income of investors.
DISADVANTAGES :• Sales of equity shares.
• Rate of return .
• Not a tax deductible income.
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Preference Shares
Preference share represents that part of share capital of a company , which carries preferential rights.
Important features of preference shares
1.Fixed rate of dividend
2.Normal voting rights.
3.Issued for a face value of Rs. 100
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Cont’d:
• ADVANTAGES:1. Raising long term capital .
2. Property Mortgage.
3. Rate of return .
4. No obligation to pay dividend.
5. No dilution of control.
•. DISADVANTAGES:1. Permanent burden to pay dividend.
2. Disadvantages to Investors.
3. High cost of raising.
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Debenture:
• Debenture is a certificate issued by a company under its common seal acknowledging a debt by its holders.
• Important features of debentures:
1. Fixed rate of interest.
2. No profits but must pay.
3. Deductible expense.
4. Redemption.
5. Voting rights
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Bank loan A Business enterprise requires short-term and long-term finance. It may raise financial resources by raising short-term loans and long-term loans.
Short-term Sources.
Long-term Sources.
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venture capital
• Venture capitalists are groups of (generally very wealthy) individuals or companies specifically set up to invest in developing companies. Venture capitalists are on the look out for companies with potential. They are prepared to offer capital
(money) to help the business grow. In return the venture capitalist gets some stakes in the running of the company as well as a share in the profits made. 13
Government grant • These grants are often linked to incentives to firms to set up in areas that are in need of economic development. • One of the disadvantages of this type of funding is that it involves large amounts of paperwork and administration. • This can add to costs and in some cases might not make the project worthwhile.
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mortgage
• A mortgage is a loan specially for the purchase of property. • Mortgages are use as a security for a loan:it is often called taking out a second mortgage. If the business does not work out and the borrower could not pay the bank the loan then the bank has the right to take the home of the borrower and sell it to recover their money.
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