Sources Of Finance

Objective To know about Various sources of finance

Finance Meaning
Finance Money

Life blood of every activity or business

For an Individual
Salary Income

Loans from

Friends Company and Banks

Why business need Money?

To Start up

To Expand
To relocate To takeover To Replace To employ more staff

Factors Affecting Demand for Finance

Objectives

Risks
Colleteral offered Time Factors Legal Status of business Financial Status of the firm Economic Climate

Internal Sources of Finance

Profit (RE) Working Capital Sale of Assets Short term

Over Draft Loans

Trade Credit
Factoring Loans

External Long term

Mortgage Debentures Venture Capital

Internal Sources of Finance

Sources

Personal Savings (Sweat Equity) Profit (retained earnings) Reduced working Capital Sale of assets and lease back Cash at bank Owners investment Reduce stock levels Delay payment to creditors

Term of Finance
Short term finance (up to one year)

Cash at bank Trade Credit Delaying payment to creditors

Retained earnings Sale of assets Owners investment

Medium term finance (1 3 yers)

Long term finance

Long Term Finance

A business requires funds to purchase fixed

assets like land and building, plant and machinery, furniture etc. The capital required for these assets is called fixed capital. Purpose of long term finance:

To Finance fixed assets To finance the permanent part of working capital To finance growth and expansion of business

Factors determining long-term financial requirements

Nature of Business

Nature of goods produced

Technology used

Sources of long term finance

Shares

Debentures
Public Deposits Retained earnings Term loans from banks Loan from financial institutions

Retained Earnings
The percentage of net earnings not paid

out as dividends, but retained by the company to be reinvested in its core business or to pay debt. It is recorded under shareholders' equity on the balance sheet.

Merits
Cheap Source of Capital

Financial stability
Benefits to the shareholders

Limitations Huge Profit Dissatisfaction among shareholders Fear of monopoly Mis-management of funds

External Sources of Finance

Loans

Over Draft Loan Debentures

Share Capital Factoring Debts Lease Hire Purchase Mortgage Venture Capital

Share Capital
Meaning of Share Capital:

Share capital denotes the amount of capital raised by the issue of shares, by a company. It is collected through the issue of shares and remains with the company till its liquidation. shareholder are the owners of the company The total share capital is divided into small parts and each part is called a share. Share is the smallest part of the total capital of a company

Types of Shares
Equity shares

Preference Shares
Features:

Preference in dividends. Preference in assets in the event of liquidation. Convertible into common stock. Callable at the option of the corporation. Nonvoting.

Types of Preference Shares

Cumulative or Non-cumulative

Redeemable and Non- Redeemable

Participating Preference Share or non-

participating preference shares

The Secrets to Successful Financing

1. Choosing the right sources of capital is a decision that will influence a company for a lifetime. 2. The money is out there; the key is knowing where to look. 3. Creativity counts. Entrepreneurs have to be as creative in their searches for capital as they are in developing their business ideas.

4. The World Wide Web puts at entrepreneurs fingertips vast resources of information that can lead to financing. 5. Be thoroughly prepared before approaching lenders and investors. 6. Entrepreneurs should not underestimate the importance of making sure that the chemistry between themselves, their companies, and their funding sources is a good one.