KAMPALA INTERNATIONAL UNIVERSITY IN TANZANIA

FACULTY: COMPUTING MANAGEMENT AND SOCIAL SCIENCE

DEPARTMENT: BUSINESS MANAGEMENT
NAME OF ASSIGNMENT: INDIVIDUAL ASSIGNMENT
NAME OF LECTURE: MR JUVENARY
NAME OF STUDENT: KHALID ALI OMAR
REGISTRATION NUMBER: BBA/25711/2201/DT
QUESTION: In details explains the followings sources of funds
 Preference shares
 Equity shares
 Debentures
 Public deposits
 Commercial papers
 Lease financing
 Commercial bank loan
 Right issues
 Ordinary shares
 Deferred Ordinary shares
 Venture capital and
 Trade credit
 INTRODUCTION

Sources of funds refers to the origin of funds that an individual or entity uses in a specific
business transaction or an Investment.
Sourcing of funds may be done for various reasons and those areas that needs these funds may be
for capital assets acquirements, new machinery or the construction of a new building or depot.
Normally such development are financed internally where the capital for acquisitions of
machinery may come from external sources. These sources of funds are explained bellow in
detailed content.

1. Preference shares.
As the name indicates, these shares have certain privileges and prefencial rights distinct
from those attached to equity shares, they referred as preferred stock. These shares
provides shareholders with a fixed dividend paid before any dividends are paid to
ordinary shareholders, thus they do not typically carry voting rights. They are called
preference shares because they carry the following preferential rights.
a) A preferential right as to the payment of dividend during the lifetime of the
company
b) A preferential right as to the return of capital in the event of winding up the
company.
Holders of these shares have a prior right to receive the fixed rate of dividend before
any dividend is paid to equity shares. The rate of preference is prescribed in the issue.
These share fall under four categories named, cumulative preferred stock, non
cumulative preferred stock, participating preferred stock and convertible preferred
stock
Cumulative preferred stock includes a provision that requires the company to pay
shareholders all dividends, including those that were omitted in the past before the
common shareholders are able to receive their dividends payments
Non cumulative preferred sock does not issued any omitted or unpaid dividend. If the
company choose not pay the dividends inn any given year, the shareholders of the
non cumulative preferred stock have no right or power to claim such forgone
dividends in any time in the future.
Participating preferred stock provides its shareholders with the right to be paid
dividends in amount equally to generally specified rate of preferred dividend plus an
additional dividend based on predetermined condition.
 Convertible preferred stock includes an option that allows shareholders to convert
their preferred shares into a set numbers of common shares, generally any time after
pre established date.

2. Equity shares
Also known as ordinary shares, they represent ownership in a company and they are
foundation for the creation of the company. Equity shareholders are entitled to vote at
general meetings and shares in the company’s profit through dividends but after
preference shareholders. For a legal reason a company can not exist without equity
shareholders. These shareholders have two important features of shares, which are
a) The equity shares do not enjoy preference in getting dividends.
b) The equity shares do not have priority for payment of capital at he time of
winding up of the company.
They have a nominal or face value of 1$ or 50 cent. The market value of a quoted
company’s shares bear no relationship to their nominal value, except that when
ordinary shares are issued for cash, the issue price must be equal to or be more
than the nominal value of a share.
Equity shareholders are paid on the basis of earnings of the company and do not
get a fixed dividend. They referred to as residual owners.
They receive what is left after all other claims on the company’s income and
assets have been settled.
Through their right to vote, these shareholders have a right to participate in the
management of the company because they represent the ownership of the
company and are vital source for raising long-term capital.

3. Debentures
Debentures are a debt instrument used by company and a government to issue the loan,
they are long -term debt instrument issue by a company to borrow funds. Debentures
holders are creditors to the company and received fixed interest payment.
Debentures are issued to corporate based on their reputation at fixed rate of interest and
they are also known as bond which serves as IOU between the issuer and purchaser.
Company use debentures when they need to borrow the money at a fixed rate of interest
for its expansion.
Debentures are advantageous for company since they carry lower interest rates and
longer repayment dates as compared to other types of loans and debt instruments.
Debentures are of different types such as registered and bearer debentures, redeemable
and irredeemable debentures, convertible and nonconvertible debentures
a) Registered debentures. When debt are issued as debentures they may be registered
to the issuer, in this case the transfer or trading in these securities must be
organized through a clearing facility that alerts the issuer to changes in ownership
so that they can pay interest to the correct bondholder.
 b) Bearer debenture. This is not registered with the issuer. The owner of the
debentures is entitled to interest simply by holding the bond
c) Redeemable debentures. This clearly spell out the exact terms and dates by which
the issuer of the bond must repay their debts in full
d) Irredeemable debentures. This is where the issuer is not liable to repay in full for
certain date, they are also known as perpetual debentures.
e) Convertible debentures. Are bonds that can convert into equity shares of the
issuing corporation after a specific period
f) Non convertible debentures. Are traditional debentures that can not be converted
into equity of the issuing corporation
Also debenture includes number of features such as
o Interest rate
o Credit rating and
o Maturity date
Example of denture is US Treasury bond, they help finance projects and funds
day to day governmental operations.

4. Public deposits
These are funds that are raised by company directly from the public, typically for a fixed
term. Company offers higher rates of interest offered on public interest, usually higher
than that offered on bank deposits.
Any person who prefers depositing money in organization does so by filling up a
prescribed form, the organization in return issued a deposits receipts as an
acknowledgment of the debt. Public deposits take care of both medium and short term
financial requirements of a business
As the depositor receive higher interest rate than that offered by banks, the cost of
deposits to the company is less than the cost of borrowings from banks. The deposits are
profitable to both the depositor as well as the organization. Company generally invite
public deposits for a period of up to three years
Advantages of public deposits
 Public deposits do not usually, create any charges on the assets of the company.
The assets can be used as securities for raising funds. This means that the
company can raise loan based on its assets. The company’s assets can secure any
future mortgage.
 As the depositors do not have voting rights the control of the company is no
further diluted.
 The procedure of depositing is easy and does bearly contains restrictive
conditions. In this case there is no need to get listed on a stock market like shares
or debentures, and no permission is required from the controller of the capital.
  Cost of public deposits is lower than the cost of borrowings from banks and other
financial institutions. Public deposit interest is tax deductible which reduces the
tax bill. This results public deposits to be cheaper than private deposits.
Limitations of public deposits
 Newborn companies find it difficult to obtain funds through public deposits
 It is an untimely source of finance as the public may not responds when the
company needs money.
 Collection of public deposits may prove difficult, particularly when the size of
deposits required is large.
Digital payments and technological advancements have enable banks to offer
online banking, as well as public deposits and withdrawals.
With various public deposits methods such as saving account, recurring account,
current account and fixed deposits, you can save money and guaranteed returns
where you can get a reasonable interest rate.

5. Commercial papers
These are unsecured short term debt instruments issued by corporations to meet short
term liabilities, typically with maturity of less than 270 days. Its typically used to finance
short term liabilities such as payrolls, account payable and inventories.
Commercial papers involves a specific amount of money that is to be repaid at a specific
date. Minimum denominations are $ 100,000.
Commercial papers are usually issued at higher value, its unsecured money market
instruments issued in the form of promissory note and transferable between primary
dealers and all Indian Financial institutions.
Types of commercial papers
i. Promissory notes. These are written promises to pay a specific amount of money
on a certain date. They are used by a company to borrows funds without having to
use any collateral, and promissory notes can ranges from just a few days up to a
year.
Promissory notes are sold at a discount from their face value and redeemed at a
face value upon maturity, meaning the difference between those two amounts is
technically the interest earned.
ii. Drafts. These are orders written by one party (the drawer) directing another party
(the drawee) to pay a specified sum to a third part (the payee). The drawee is
usually a bank. As commercial paper drafts can be used in trade financing to
facilitate the purchase of goods and services. Drafts can either be a sight draft
which are payable on demand and time drafts which can be payable at a specific
future date.
iii. Banker’s Acceptance. These are time drafts that have been accepted and
guaranteed by the bank. They are commonly used in international trade to ensue
 payments to exporters. The bank’s acceptance of the drafts means that the bank
promises to pay the face value of the drafts at maturity. Banker’s acceptance can
also be traded on a secondary market before maturity.
iv. Certificate of deposits (CDs). These are time deposits issued by a bank that pays
a fixed interest rate at a specific period. CDs are considered low risk investments
since they are backed by the issuing bank.
The above are some common types of commercial papers, also commercial papers
use various terms such as issuer, term/maturity, discount/face value,
secured/unsecured and liquidity
Advantages of commercial papers
 It does not need to be registered with securities and exchange commission
as long as it matures in no more than nine months or 270 days.
 It is also easier to deal compared to the efforts, time and money involved
in getting a business loan.
 Commercial paper provides an effective ways for investors to diversify
portfolios.
Dis advantages of commercial papers
 It does not offer access to capital for all institutions.
 Low interest rate for issuer means low rate of return for investors.
6. Lease financing
Is a financial arrangements where a company can use an assets without owning it, by
paying regular lease payments to the owner. Is a contractual agreements whereby one
party that is the owner of an assets grants the other party the right to use the assets in
return for a periodic payments.
In simpler term leasing is renting an assets of the company for a specified period. The
lessor is the owner of the party and the lessee is the party that uses the assets. The lessee
pays a fixed periodic amount called lease rental to the lessor for the use if assets.
There are two basic forms of lease, operating leases and finance leases.
o Operating leases are rental agreements between the lessor and lessee whereby:
i. The lessor supplies the equipment’s to the lessee
ii. The lessor is responsible for servicing and maintaining the leased
equipment.
iii. The period of the lease is fairly short, less than the economic life of the
assets, so that the end of the lease agreements the lessor can either lease
the equipment to someone else and obtain a good rent for it, or sell the
equipment secondhand.
o Finance lease are lease agreements between the user of the leased assets and the
provider of the finance for most, or all of the assets expected useful life.
Important characteristics of lease finance
I. The lessee is responsible for the upkeep, serving and maintaining of the
assets. The lessor is not involved in this at all.
 II. The lease has a primary period, which covers all or most of the economic
life of the assets.
III. Its usually at the end of primary lease period to allows the lessee to
continue to lease the assets for an indefinite secondary period, in return for
a very low nominal rent.
Advantages of lease finance
i. Lease rental paid by the lessee are cuts from taxable profits
ii. Leasing provides finance without diluting the ownership of the
assets.
iii. It enable the lessee to obtain the assets with a lower price rather
than owning it.
iv. The lessor carries the risk of obsolescence. This allows flexibility
to the lessee to replace the assets.
v. The lease agreement does not affect the debt raising capacity of an
enterprise.
Disadvantages of lease finance
i. It may result in higher payout obligations in case the equipment
is not found useful and the lessee opt for premature termination
of the lease agreements.
ii. Financial activities of the business may be affected in case the
lease is not renewed.
iii. The lessor never becomes the owner of the assets. It denies him
of the residual value of the assets.
iv. There are chances that a lease arrangements might impose a
certain restrictions on the use of the assets.

7. Commercial Bank loans

These are loans that can be provided by commercial bank which can be short term or long
term and used for variety of purposes such as working capital or expansion. They usually
have three to five years term. Commercial bank is a kind of financial institution that
carries all operations related to deposits and withdrawals of money for the general public,
providing loans for investments and other such activities.
Commercial bank loans can be secured or unsecured and typically come with an agreed
upon repayment schedule with interest.
Characteristics of commercial bank loans
a. Fixed or variable interest rates: commercial bank loan can have either a fixed
interest rate, which remains constant over the loan period or a variable interest
rate, which fluctuate based on market condition or benchmark rates likes LIBOR
or the bank’s prime rate.
 b. Secured or Unsecured: Secured loans requires the borrowers to provide collateral
such as real estate, equipment or inventory, to guarantee the loan. If the borrower
defaults the bank can seize the assets.
Unsecured loans do not requires collateral but usually have higher interest rates
due to the increased rate of the lender.
c. Loan term: Short term loan typically used for immediate working capital needs
such as paying suppliers or managing cash flow. The repayment period ranges
from a few months to a year.
Long term loan are used for major capital expenditures, such as purchasing
equipment, or real estate. These loans can have a repayment term of several years,
depending on the loan amount and the borrower’s needs.
d. Repayment structure: Some loans comes with a fixed installment payments,
which includes both principal and interest, spread evenly over the loan term, they
are known as fixed payments
Some loan may have smaller payments during the loan term but require a large
final payment at the end of the term, they are known as balloon payments.
e. Loan documentation and processing. Bank requires through documentation before
approving loans. This includes financial statements, business plan, collateral
details and sometimes personal guarantee from business owners.

Types of commercial Banks

a) Term loan. These are loans with a specific repayments schedule and a
fixed interest rate used for long term capital investments like buying
machinery or real estate
b) Overdraft facility. A flexible credit facility where a company can
withdraw more money than it has in its bank account, up to a pre approved
limit. Its mainly used for managing short term liquidity.
c) Working capital loans. These loans helps businesses manage day to day
operations by covering short term expenses such as wages, rent, and
inventory purchases.
d) Lines of credit. A pre approved credit line that a business can draw upon
when need and the borrower only pays interest on the amount used.
Advantages of commercial bank loans
i. Availability of large amount.
ii. Structured payments
 iii. Flexibility
iv. Lower interest rate
Disadvantages of commercial bank loans
i. Strict eligibility criteria
ii. Collateral requirements
iii. Repayment obligations
iv. Long processing time,

8. Right issues
An offer given to existing shareholders to purchase additional shares at a discounted
price, allowing capital to raise more capital