1. SOURCES OF BUINESS FINANCE

2. What is Business Finance? What are the financial needs of a business ?
Concept of Finance
What is Finance?
What is Business Finance?
What are the financial needs of a business ?

3. Factors Affecting Fixed Capital Requirements
Nature of business
Scale of business
Expansion of business

4. Factors Affecting Working Capital Requirements
Rate of stock turnover
Credit policy
Seasonal Business
Nature of business

5. Classification of Sources of Business Finance
Period
Ownership
Generation
Long Term
Owner’s Funds
Internal
Medium Term
Borrowed Funds
External
Short Term

6. Internal Sources of Finance- Owner’s Funds
Retained Earnings – Self Financing
Features:
Undistributed profits
Depends on net profits, dividend policy and duration of business
No additional burden

7. Retained Earnings Merits Demerits Dependable & Permanent
Dissatisfaction amongst the shareholders
No additional cost
Fall in market price of shares
No burden
Uncertain source of fund
Operational freedom & flexibility
Opportunity cost is ignored
Control
Issue of bonus shares leading to overcapitalization

8. Internal Sources of Finance- Owner’s Funds
2. Issue of Shares:
Total capital is divided into small units called shares
The smallest unit is called par value or face value of shares
Money raised through issue of shares is called capital
Individual investing in the company by way of purchasing shares are called shareholders
Types of shares issues: Equity & Preference

9. Equity Shares Features: Ownership capital – owners of the company
Permanent source of finance
Decision makers
Residual owners
Limited liability
Fluctuating returns

10. Equity Shares Merits Demerits Permanent source of finance
Expensive method of raising finance
No burden on the company
Higher returns to be paid
Control over the company
Dilution of control
Higher Returns
No certainty of return
No charge on assets of the company
No security of repayment of invested amount
Increases the creditworthiness of the company
Selling of shares may affect the creditworthiness of the company

11. Preference Shares Fixed rate of return
Preferential priority with repect to payment of dividend or repayment of capital
No voting rights
Creditors of the company
No charge on assets of the company

12. Types of preference shares
Cumulative & Non Cumulative
Convertible and Non Convertible
Redeemable and Irredeemable
Participating and non participating

13. Preference Shares Merits Demerits Preferential payment of dividend
Rate of dividend is fixed
No dilution of control
No voting rights
Income is steady and safe
Restricts the investor from enjoying higher profits
No charge on assets
No security of repayment of investment
Lower cost of capital
No tax benefits
Preferred for cautious investors
Not attractive for investors willing to take risk
Preferential rights on repayment of investment
Dilute the claims of equity shareholders

14. Difference between Preference Share & Equity Shares
Returns on capital
Repayment of capital
Voting rights
Risk in investments
Suitability
control

15. EXTERNAL SOURCES OF FINANCE
Debentures: Long term borrowed funds
Document or a certificate issued under a common seal of a company as an acknowledgement of debt to the holder in accordance to the given terms and conditions.
Long term sources of funds
Rate of interest and time period
Secured loans
Creditors of the company
Company planning to issue debentures to general public must get the company rated by CRISIL(Credit Rating & Information Services of India Ltd)

16. Types of Debentures Convertible Zero Interest Debentures
Convertible and Non Convertible Debentures
Secured & Unsecured Debentures
Registered & Bearer Debentures
First & Second Debentures

17. EXTERNAL SOURCES OF FINANCE
Debentures
Merits:
It can be issued for a specific period according to the need of the company
Fixed rate of return
Control
Safe for the investors
Mostly secured
Tax liability reduces
Repayment of investment – enjoy preferential rights

18. Debentures
Demerits:
Process of raising finance long, complex and expensive (CRISIL)
Financial burden in the years of non performance
No voting rights
Fixed returns
Reduces the company’s capacity to borrow funds
Not attractive for investors who are willing to take risk to earn higher returns
Debentures need to be repaid after a fixed period of time

19. External Sources of Finance
Trade Credit
It is the credit extended to business by its suppliers. It is the facility to purchase inventories or services without making immediate payment.
Credit is extended by suppliers
Purchase on credit & pay within the stipulated period of time
Reduces the need for working capital
Short term source of finance
It depends on the creditworthiness of the firm
Does not involve any payment of interest

20. External Sources of Finance
Merits of Trade Credit:
Convenient & Continuous
Does not involve any formalities
Increases sales
Enables the enterprise to maintain high stock levels
No additional cost of raising finance
No charge on the assets of the firm

21. External Sources of Finance
Limitations of Trade Credit:
High Stock Volumes - Over Trading
Value of funds generated is limited
Increase in the price of the goods

22. EXTERNAL SOURCES OF FINANCE
8. Commercial Banks:
Loans on interest depending on the nature of loan
Medium and short term loans against security
Loans in the form of overdraft, term loans, cash credit, factoring etc

23. Commercial Banks
Merits:
Financial assistance as and when required
Keeps the business information confidential
Simple and fast
Most flexible source of finance

24. Commercial Banks Demerits: Extension or renewal is uncertain
Collateral security and sometimes personal security from the owner
Sometimes makes the procedure lengthy and complicated
Bank may impose many kinds of restrictions like sale of mortgaged assets, withdrawal of money of money by owner without bank permission etc
Suitable for small and medium business only

25. EXTERNAL SOURCES OF FINANCE
9. Financial Institutions:
Government has established many financial institutions at both centre and state levels
They provide both long and medium term finance in the form of owned and borrowed capital
They support business with technical and managerial assistance as well
The main aim is to provide sufficient funds to support the industrial development of the country
Thus they are also called developing banks
Suitable for expansion, development, reorganisation

26. Financial Institutions
Merits:
Provide finance for long term period
Reduces the burden of the enterprises
Business can get financial, technical, marketing and consultancy services under one roof
Financial institutions are able to provide finance even during depression periods

27. Financial Institutions
Demerits:
Procedure – rigid, time consuming and expensive
Restrictions on companies regarding the payment of dividends
They may have their nominees on the BOD of the borrowing company thereby restricting the powers of the company

28. Inter Corporate Deposits
ICDs are unsecured short term deposits made by one company with another company.
These are unsecured loans with high risk factors
Interest rate on ICD depends on the credit rating of the corporate
Interest rate is higher than the rate offered by the Bank

29. Merits of ICD Lender company can use surplus effectively
They are easily procured
Brokers maintain the secrecy of lenders and borrowers

30. Demerits Of ICD
Company can not lend more than 10% of its net worth to a single company
Company cannot lend beyond 30% of its net worth in total
Borrowed funds cannot exceed 50% of net owner’s funds
Market of ICD is not properly structured

31. Public Deposits
PD are the source of finance where the funds are raised from shareholders, employees or general public
Higher rate of interest than the rate offered by the bank
Regulated by the RBI
Period of finance – 6 months to 3 years
They need not be backed by any charge against assets
PD cannot be 25% of share capital or reserves

32. Merits
The process of raising funds is simple
Higher rate of interest
Cheaper source of finance
No mortgage of assets
Control retained
Interest paid on PD is regarded as expenses

33. Demerits Not easy for new companies Not reliable source of finance
Attracts only cautious investors
Not suitable for long period
Complex procedure
Amount is limited only to the 25% of share capital

34. Financial Institutions
3. International Capital Markets:
The most common financial instruments used to meet the need of borrowing in dual currency are:
Global depository Receipts (GDR’s)
GDR’s are the depository receipts issued by the Depository Bank against the receipt of local currency shares of a company
It is a negotiable instrument issued in US Dollars
It can be traded freely like any other security
A company issues GDR to raise finance in foreign currency
It is listed and traded on a foreign stock exchange
GDR represents a specific no. of shares and the holder of GDR can convert GDR into shares any time
GDR’s enjoy dividend and capital appreciation but do not carry any voting rights
Examples: Infosys, Reliance, Wipro, ICICI

35. Financial Institutions
B) American Depository Receipts (ADR’s):
ADR’s are issued by a non US company to an American Citizen.
ADR’s are listed and traded on USA stock exchange only
A non US business enterprise issues ADR to an American citizen and then funds can be raised by selling the ADR’s at the US stock exchange

36. Financial Institutions
c) Indian Depository Receipts (IDR’s)
It is a financial instrument denominated in Indian rupees in the form of a depository receipt created by a Indian Depository against the underlying equity of issuing company
It enables the foreign companies to raise funds from the Indian securities market
The custodian of securities is registered with the SEBI
The foreign company IDRs deposit shares to an Indian depository and the depository issues receipts to investors in India against the shares deposited
The size of an IDR cannot be less than Rs 50 crores

37. Financial Institutions
d) Foreign Currency Convertible Bonds (FCCB’s)
FCCBs are the debt securities issued in foreign currency with a fixed rate of interest
They have the option of being converted into equity or depository receipts after a specific period of time at a predetermined price or exchange rate
FCCBs are listed and traded in foreign stock exchange

38. Factors Affecting the Choice of the Source of Funds
Cost
Financial Strength & Stability of Operations
Form of Organisation and Legal Status
Purpose and Time Period
Risk Profile
Control
Effect on Credit Worthiness
Flexibility and Ease
Tax Benefits

39. Thank You