1. 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.

2. 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

3. 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

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

5. 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.

6. 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

7. 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

8. 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.

9. Types of Leases
Operating Lease
Financing Lease
Sale and Lease Back

10. 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.

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

12. 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.

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

14. 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

15. Advantages
Higher income
Fewer defaulters
Recycle recovered funds

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

17. 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

18. 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.

19. 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

20. 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.

21. 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

22. 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.

23. 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.

24. Process Fund formation stage Investment stage Management stage
Exit stage

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

26. Disadvantage
Debt burden
Board seats
Required exit strategy