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Sources of fund

BY: ADERSH.SR

ACCORDING TO THE PERIOD


Long term finance: shares,
debentures, long term loans ,venture
capital, retained earnings,
short term finance: Bank credit
,customer, advance , public deposit ,
trade creditors factoring, commercial
paper
Medium term finance : hire
purchase ,leasing ,commercial banks

According to ownership
a, Ownership capital /owned capital
Share capital ,retained business
b, borrowed capital /creditor ship
capital
debentures ,bonds, loans

According to sources of generation


internal source : retained earnings and
depreciation of funds
External sources : shares ,debentures, loans
etc.
According to mode of finance
Security finance : this include financing through
valid securities such as shares and debentures
they are long-term funds
internal financing: this include financing
through retained earnings and depreciation of
funds

Loan financing : this include the short


term and long term loans

Factoring
Factoring is an agreement in which
receivable arising out of sale are sold
by a firm (client ) to the factor ( a
financial intermediaries) .

Advantages
Establishes a story foundation
Maximum profitability
Capture growth opportunities

Disadvantages
Cost
Possible harm to customer relation
Company image distortion

Commercial paper
It is a short term money market
instrument . it is a promissory note which
is negotiable by endorsement and fit for
delivery with a fixed maturity period
between one month to one year. It help to
raise short term deal at attractive rates.

Advantages

High credit ration


Flexibility
Provide exist policies
It is sold on an unsecured basis and
doesnt contain any restrictive
conditions.
It provide a continuous source of
funds

Disadvantage
This form of financing is not a reliable
and dependable one and as such it is
difficult to formulate the financial
plan on the basis of it.
It is inelastic source of finance.
Limited applicability
Low bank credit limits

Venture capital
Venture capital refers financing of new
high risky venture promoted by highly
qualified entrepreneurs who lack
experiences and funds to give shape to
the ideas .In a broad sense under venture
capital financing venture capitalist make
investment to purchase equity or debt
securities from experienced entrepreneurs
who undertake highly risky venture with
potential of success

Advantages
Assert from the financial banking obtaining
venture capital financing firm can provide
a startup giving business with a valuable
source of guidance and consultation.
New innovative projects are fixed, it offers
high profitability in long run
It provides value information resources to
more business successfully

Disadvantages
Loss of control
Size of the venture capital patterns
stable could determine how much
say they having shaping in your
companies direction

Equity share
Equity shares are also known as
ordinary shares or common shares ,it
represent the owners capital in a
company ,so it is the owners capital
in a company, they have a control
over the working of the company
The rate of dividend on these shares
depend upon the profits of the
company

Advantages
Equity shares donor
create any obligation
to pay a fixed rate of
evident
It can be issued
without creating any
change over the asset
of the company
Equity share holders
are the real owners of
the country

Disadvantages
If only equity shares are
issued the company cant
take the advantages of
trading or equity
As equity capital cant be
redeemed there is a danger
of over capitalization
This share holders can
make problems in
management by
manipulation and
organizing themselves

Preference shares
Preference shares have certain
preferences as compared to other
types of shares .these share are
given to preferences

advantages
Ps a long term capital
for the company
Ps holders earn affixed
rate of dividend
Ps get preferential
rights in regards to
payments of dividend
and repayment of
capital at the time of
liquidation of the
company

Disadvantages
Financing through PS
is an expensive
sources
Cumulative PS
becomes a permanent
burden so for us the
payment of dividend is
concern

debentures
A debentures is an instrument
acknowledging a debt under the seal
of the company usually secured by a
fixed on floating charge on the
castes of the company bearing a
fixed rate of interest and repayable
within or after a specified period or
irredeemable during the existence of
the company

advantages
It provide long term
finance to a company
The rate of interest
payable is less than
the rate of dividend on
shares
Debt finance does not
dilute control

It is permanent burden
disadvantages
on the company to
repay the principle on
maturity
It is not desirable to
issue debentures by a
company having
irregular earnings
Charge on the asset of
the company restrict
from the use of
debentures financing

Public deposit
Firms may be mobilize savings from
the general public and it is termed as
public deposit. It is very cold systems
of financing.
Public deposits can be accepted by
non banking companies for a
minimum of three months for short
term deposits and six months for
other deposits

advantages
It is less costly method for raising
short term as well medium term
funds required by the business.
There is no need of creation of any
charge against any of the asset of
the company for raising fund through
public deposit.

disadvantages

Uncertain and unreliable


Unhealthy for capital marker
Uneconomical
Difficulty of collection

Trade credit
Trade credit is the credit extended by
one trader to another for the
purchase of goods and services.
sellers or suppliers of different kind
of products or raw material provide
credit to their customers . The credit
offered by the seller or supplier is
known as trade credit or bills
payable.

Advantages and
disadvantages
Only limited

It is convenient and
amount of funds
continuous source
can be generated
of funds
through trade
credit
Readily available in
It is generally a
case the credit
worthiness of the
cost to source of
customer is known
funds as compared
to the seller
to some other
source of raising
It needs to promote
money
the sale of
organization

leasing
Only limited amount of funds can be
generated through trade credit
It is generally a cost to source of
funds as compared to some other
source of raising money

advantages
Only limited amount of
funds can be
generated through
trade credit
It is generally a cost to
source of funds as
compared to some
other source of raising
money

disadvantages
Normal business
operations may be
affected in case the
lease is not renewed
Lease arrangement
may impose certain
restrictions on the use
of assets
Lessee never becomes
the owner of the asset

Bonds
Gamut and business issue bonds to
raise funds from investors ,bonds pay
regular interest and bond investors
get the principle bank on maturity

Advantages
Bonds are guarantied
to protected the
holder against the
risks of inflation and
are also guarantied to
keep their value even
if there is deflation

Disadvantages

Bonds are subjected


to various other risks
such as call and
payment risks

Financial institutions
commercial banks and specialized
institution provide Long term fund to
corporation. The bank which provide
financial assistance to the industry for
the economic development of the
country are known as development
bank.

Advantages
Availability of finance at reasonable
rate of interest
Facility of underwriting and equity
participation of new companies
Facility of repayment in easy
installments
Reasonable security requirement for
loan assistance

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