Term Loans Source of long term loans (debt finance)which is repayable in more than one year but less than 10 years. Obtained for financing large expansion, modernization or diversification projects. Called project financing.

Features of Term Loan Security –secured borrowing Interest payment and principal repayment – default –additional interest Restrictive covenants – financial institution- impose restrictive condition on the borrowers. Direct Negotiations- low cost of raising loans Convertibility- can convert loan into equity Repayment Schedule- specified

Term Loans–Advantages To Borrowers Cost of term loans is lower than the Ke or Kp Do not result in dilution of control. To Lenders Fixed interest & definite maturity period Secured lending Restrictive covenants to protect the interest of the lender

Term Loans–Disadvantages To borrowers Obligatory payments Increase financial risk Restrictive covenants To lenders No voting rights

Lease Defined Lease is a contract under which a lessor, the owner of the assets, gives right to use the asset to a lessee, the user of the assets, for an agreed period of time for a consideration called the lease rentals. In up-fronted leases, more rentals are charged in the initial years and less in the later years of the contract. The opposite happens in back ended leases. Primary lease provides for the recovery of the cost of the assets and profit through lease rentals during a period of about 4 or 5 years.

Features of lease Competent to contract It will not provide for transfer of ownership to the lessee The goods are delivered to the lessee for a specified purpose and period. The lessee should return exactly the same goods after the lease period. The lease rentals are payable generally monthly installments at the beginning of every month. Large equipment leases -not exceeding Rs.100 lacs

Advantages To the lessee: Financing of capital goods Additional source of business Less costly than other alternatives Avoids conditionality – no dividend etc Flexibility in structuring of rentals To the lessor Full security –always owner Tax benefit-by depreciation High profitability High growth potential

disadvantage To the lessee High cost Risk of being deprived of the use of asset –wind up leasing company No change in asset Loss of ownership incentives To the lessor High risk of obsolescence Competitive market Price level changes Management of cash flows Increased cost due to loss of user benefits.

Types of Leases Operating Lease Financing Lease Sale and Lease Back

Operating Lease Shot-term, cancelable lease agreements are called operating lease. Tourist renting a car, lease contracts for computers, office equipments and hotel rooms. The Lessor is generally responsible for maintenance and insurance. Risk of obsolescence remains with the lessor.

Financial Lease Long-term, non-cancelable lease contracts are known as financial lease. Examples are plant, machinery, land, building, ships and aircrafts.

Sale and Lease Back Sometimes, a user may sell an (existing) asset owned by him to the lessor (leasing company) and lease it back from him. Such sale and lease back arrangements may provide substantial tax benefits.

Hire Purchase Hire purchase means hiring of an asset for a period of time and at the end of the period, purchasing the same.

Features of Hire purchase A proposal from the hirer to acquire the goods and acceptance of the proposal by the owner on mutually agreed upon terms to be reduced in writing in the form of an agreement after consent between the parties. Legal relationship The owner and hirer should have the capacity The contract should not oppose public policy Consideration is rental payment

Advantages Higher income Fewer defaulters Recycle recovered funds

Disadvantage Encourages lavish expenditure Future income is mortgaged Higher installment price Difficulty in re-sale of goods

Difference Basis Lease Financing Hire Purchase Financing Ownership Ownership is not transferred Transferred to the hirer Tax Deductibility Entire lease rentals are tax deductable No Salvage value Cannot realise Can realize Magnitude The magnitude of funds are large Relatively low Margin money No margin money is required 20-25% margin is required Maintenance Finance lease only-lessee Operating lease- lessor responsible Hirer himself

Venture capital Venture capital is defined as long term equity investment in novel technology based projects with display potential for significant growth and financial return.

Features New ventures – expect more gain Continuous involvement Mode of investment –equity financing Objective- capital gain & regular return Hands-on approach –value added services High risk-return ventures Nature of firms – small and medium size Liquidity when new ventures are highly successful

Advantages Large sum of equity finance Through VC, secure funding from other sources Part of economic growth Promoting innovative ideas Encourage new breed of entrepreneurs Venture capitalist could benefits from the growing economy.

Disadvantage Long and complex process Requires detailed business plan, need professional help Pay legal and accounting fees. Venture capitalist is taking the risk, the management control may get out of the entrepreneur

Private equity Equity capital that is not quoted on a public exchange is called private equity. The majority of private equity consists of institutional investors accredited investors who can commit large sums of money for long period of time. Private equity is defined as dedicated pools of capital which are managed by independent PE firms and focus on equity or equity-linked investments in privately held companies.

Features Private equity holders can enjoy the benefit of acquiring majority or minority stakes. Usual duration of stay of private equity holder in a business enterprise varies from 3 to 6 years. It takes around 3 months to complete a usual PE transaction.

Process Fund formation stage Investment stage Management stage Exit stage

Advantages Substantial liquidity Growth capital Eliminate personal guarantees Obtain a strong partner with aligned goals Second bite at the apple

Disadvantage Debt burden Board seats Required exit strategy