By

Bilen Fantahun Dejene

20BABBA413

School Of Liberal Studies,

Pandit Deenayal Energy University

 What do you understand by working capital finance?

 Working Capital is a financial metric that represents operating liquidity

available to a business.
 Working Capital is the difference between a company’s current assets and
current liabilities. It is a good indicator of a business’s liquidity and short-
term financial health.
 The goal of working capital management is to ensure that the firm is able to
continue its operations and that it has sufficient cash flow to satisfy both
maturing short-term debt and upcoming operational expenses.
 Working capital finance is a type of business finance used to fund the day-to-
day operations of a company.
 It is used to cover short-term expenses, such as inventory purchases, payroll,
rent, utilities, and other ongoing expenses that are necessary to keep the
business running.
 Working capital finance can be in the form of a loan, line of credit, or other
type of financing. It is important for businesses to have access to working
capital finance to ensure that they have enough cash flow to fund their
ongoing expenses and operations. This type of finance is also used to
manage and forecast the cash flow in the business so that it remains healthy
and profitable over the long term.

What are the sources of working capital finance? Explain

in detail about each source.

There are two most significant short-term sources of finance for working capital are
 Trade credit
 Bank borrowing
1. Trade credit:
  Trade credit is an arrangement between a business and its suppliers that
allows the business to purchase goods or services on credit and pay for
them at a later date. This can be an important source of working capital
finance, as it allows businesses to maintain their inventory levels without
having to pay for everything upfront.
 Companies generally source raw materials and other items from suppliers
on credit. The amount payable to these suppliers is also treated as a
source of working capital. Usually, the suppliers grant their buyers a
credit period of 3 to 6 months. Thus, they provide, in a way, short-term
finance to the purchasing company. The availability of trade credit
depends on various factors like the buyer’s reputation, financial position,
business volume, and degree of competition, among others. However,
when a business avails trade credit, it stands to lose the benefit of cash
discount, which it would earn if they make the payment within 7 to 10
days of making the purchase. This loss of cash discount is treated as an
implicit cost of trade credit.

Invoice financing: This is a type of finance where a lender provides businesses with
a loan against their unpaid invoices. The lender pays the business a percentage of
the invoice value upfront, and the business repays the loan when the invoice is paid.
Advances from Customers: One effortless way to raise funds to meet the short-
term requirement is to ask customers for some payment in advance. This advance
confirms the order and gives much-needed cash to the business. No interest is
payable to the customer for this advance. Even if any business pays interest, it is
very nominal. Hence, this is one of the cheapest sources of raising funds to meet
companies’ short- term working capital requirements. However, this is possible only
when the customers do not choose the terms of the sellers.
Leasing: This type of finance involves a business renting an asset from a lender for
a fixed period. The business pays regular payments to the lender, and at the end of
the lease, they return the asset.
Factoring: This is similar to invoice financing, but instead of providing a loan, the
lender buys the unpaid invoices from the business at a discount. The lender then
takes responsibility for collecting payment from customers.

2. Bank borrowing

On the other hand, the short-term external sources of working capital include capital
from external agencies like banks, NBFCs, or other financial entities. Some of the
primary sources of short-term bank sources of working capital are

 Loans from Commercial Banks: Businesses, mostly MSMEs, can get loans
from commercial banks with or without offering collateral security. There is no
 legal formality involved except creating a mortgage on the assets. Repayment
can be made in parts or lump sum at the time of loan maturity. At times, banks
may offer these loans on the personal guarantee of the directors of a country.
They get these loans at concessional rates; hence it is a cheaper source of
financing for them. However, the flip side is that getting this loan is a time-
consuming process.
 Public Deposits: Many companies find it easy and convenient to raise funds for
meeting their short-term requirements from public deposits. In this process, the
companies invite their employees, shareholders, and the general public to
deposit their savings with the company. As per the Companies Act 1956,
companies can advertise their requirements and raise money from the general
public against issuing shares or debentures. The companies offer higher interest
rates than bank deposits to attract the general public. The biggest of this source
of financing is that it is simple and cheaper. However, its drawback is that it
may not be available during the depression and financial stringency.
 Bill Discounting: Just as business buys goods on credit, they offer credit to their
buyers. The credit period may vary from 30 days to 90 days and sometimes
extends, even up to 180 days. During this period, the company funds get
blocked, which is not good. Instead of waiting that long, sellers prefer to
discount these bills with a bank or NBFC. The financial entity charges some
amount as commission, called a ‘discount’, and makes the balance payment to
the sellers. This discount compensates them for the time gap between disbursing
and collecting the money on the maturity of the bill. This ‘discount’ charged by
the bank is treated as the cost of raising funds through this method. Businesses
widely use this method for raising short-term capital.
 Bank Overdraft: Some banks offer their esteemed customers and current
account holders a facility to withdraw a certain amount of money over and
above the funds held by them in their current account with the bank. The bank
charges interest on the amount overdrawn and the period it is withdrawn. The
overdraft facility is also granted against securities. The bank sets this limit and is
subject to revision anytime, depending upon the customer’s creditworthiness.

What are the sources of bank finance for working capital?

Explain in detail about each source.
There are different sources of bank finance for working capital, there are;

Bank Overdrafts: This is an arrangement in which a bank allows a borrower to

withdraw more money than they have in their account up to a certain limit. This
type of finance is suitable for businesses that experience fluctuating cash flows.

Under this facility, the borrower is allowed to withdraw funds in excess of the
balance in his current amount up to a certain specified limit, during the stipulated
period.

Short-term loans: These are loans that are typically repaid within a period of 1-5
years. They are suitable for businesses that need finance for a short-term project or
asset purchase.

Letters of credit: This type of finance is typically used in international trade. A

letter of credit is a guarantee from a bank to a supplier that the buyer will pay for the
goods or services provided.
Cash Credit: Cash credit is a short-term source of finance. Under cash credit, the
bank offers its Customer to take a loan up to a certain limit. Cash credit is also
known as bank overdraft.
Features of Cash Credit:
• This loan is given to meet the working capital requirements of a company.
• It is given against collateral security.
• Interest is charged only on the amount of loan taken by the customer and not on
the amount of credit sanctioned.
Purchase or Discounting of Bills: Under the purchase and discounting bills, a
borrower can obtain credit from a bank against its bills. The bank purchases or
discounts the borrowers’ bills.
The amount provided under this agreement is covered within the overall cash credit
or overdraft limit.
Working Capital Loan: A borrower may sometimes require funds in excess of the
sanctioned credit limits to meet unforeseen contingencies.
•Banks provide such accommodation through a “demand loan account”. The
The borrower is expected to pay high rates of interest in such exceptional cases.

What do you understand by mutual funds?

A Mutual Fund is a trust that collects money from investors who share a common
financial goal, and invest the proceeds in different asset classes, as defined by the
investment objective. Simply put, a mutual fund is a financial intermediary, set up
with the objective to professionally managing the money pooled from the investors
at large. By pooling money together in a mutual fund, investors can enjoy
economies of scale and can purchase stocks or bonds at much lower trading costs
compared to direct investing in capital markets. The other advantages are
diversification, stock and bond selection by experts, low costs, convenience, and
flexibility. An investor in a mutual fund scheme receives units which are in
accordance with the quantum of money invested by him. These units represent an
investor’s proportionate ownership into the assets of a scheme and his liability in
case of loss to the fund is limited to the extent of amount invested by him. The
pooling of resources is the biggest strength for mutual funds. The relatively lower
amounts required for investing into a mutual fund scheme enables small retail
investors to enjoy the benefits of professional money management and lends access
to different markets, which they otherwise may not be able to access. The
investment experts who invest the pooled money on behalf of investors of the
scheme are known as 'Fund Managers'. These fund managers take the investment
decisions pertaining to the selection of securities and the proportion of investments
to be made into them. However, these decisions are governed by certain guidelines
which are decided by the investment objective(s), and investment pattern of the
scheme and are subject to regulatory restrictions. It is this investment objective and
investment pattern which also guides the investor in choosing the right fund for his
investment purpose.

Explain the main characteristics of mutual funds in detail.

The main characteristics of mutual funds are as follows:

1. Professional Management: Mutual funds are managed by professional fund

managers who have expertise in stock selection, market analysis, and asset
allocation. These professionals continuously monitor the markets and adjust the
investments accordingly, with the objective of maximizing returns for investors.

2. Diversification: Mutual funds invest in a diversified portfolio of assets, such as

stocks, bonds, commodities, and real estate, which provides investors with exposure
to different sectors, industries, and geographic regions. This diversification helps to
reduce the risk of the portfolio and ultimately leads to higher returns.

3. Liquidity: Mutual fund units can be easily bought and sold at any time during the
trading hours, giving investors easy access to their investments. This makes mutual
funds a highly liquid investment option and is attractive to investors who require
quick access to their funds.

4. Transparency: Mutual fund companies are required to provide regular updates to

their investors regarding the performance of the fund, the assets in which it has
invested, and any changes to the portfolio. This transparency ensures that investors
stay informed and can make informed investment decisions.

5. Low minimum investment: Mutual funds offer the advantages of diversification

and professional management to small investors by allowing them to pool their
money with other investors. This makes mutual funds accessible to investors with
low minimum investment amounts that might not otherwise have access to such a
wide range of investment opportunities.

6. Cost-effective: Mutual funds are a cost-efficient option for investors who do not
have the time to research and monitor individual stocks and bonds. Investors can
benefit from economies of scale, as the cost of managing a mutual fund is
distributed across a large pool of investors. Furthermore, the fees and expenses
associated with investing in mutual funds are generally lower than those of direct
investments in stocks or bonds.

Overall, mutual funds are a popular investment choice due to their professional
management, diversification, transparency, liquidity, and cost-effectiveness. These
characteristics make mutual funds an attractive option for investors seeking a well-
diversified and professionally managed investment portfolio.

Discuss about the type of mutual funds in detail.

Mutual funds can be classified into several types based on their investment
objectives, asset class, and other characteristics. Here are some of the most common
types of mutual funds:
 Close Ended Mutual Fund
A closed ended mutual fund scheme is where your investment is locked in for a
specified period of time. You can subscribe to close ended schemes only during the
new fund offer period (NFO) and redeem the units only after the lock in period or
the tenure of the scheme is over.

However, some closed ended funds become open ended after the completion of the
lock in period or sometime AMCs might transfer the proceeds of closed ended funds
post the maturity period to another open ended fund. But to do this, consent of the
investors of the said closed ended fund is needed. While comparing open ended and
closed ended funds, some investment experts argue that the lock in period of closed
ended fund ensures that the assets of the fund remain stable due to the specified
lock- in which gives the fund manager flexibility to create a portfolio with a long
term growth potential, without fearing outflows through redemption like in an open
ended fund.

 Open Ended funds

Open ended funds are always open to investment and redemptions, hence, the name
open ended funds. Open ended funds are the most common form of investment in
mutual funds in India. These funds do not have any lock-in period or maturities;
therefore, it is open perennially. Generally open ended funds do not have any
maximum limit (of AUM) upto which it can collect investments from public. In
open ended funds, the NAV is calculated daily on the value of the underlying
securities at the end of the day. These funds are usually not traded on stock
exchanges. The big difference between open ended and closed ended mutual funds
is that open-ended funds always offer high liquidity compared to close ended funds
where liquidity is available only after the specified lock-in period or at the fund
maturity.
 Growth Fund
The aim of growth funds is to provide capital appreciation over the medium to
long- term. Such schemes normally invest a major part of their corpus in
equities. Such funds have comparatively high risks

 Income funds
Funds that invest in medium to long-term debt instruments issued by private
companies, banks, financial institutions, governments and other entities
belonging to various sectors (like infrastructure companies etc.) are known as
Debt / Income Funds
 Balanced fund
These funds provide both growth and regular income as these schemes invest in
debt and equity. • The NAV of these schemes is less volatile as compared pure
equity funds
 Money Market funds
Money market / liquid funds invest in short-term (maturing within one year)
interest bearing debt instruments. These securities are highly liquid and provide
safety of investment, thus making money market / liquid funds the safest
investment option when compared with other mutual fund types
On the basis of Special Schemes

 Industry-specific schemes

Industry Specific Schemes invest only in the industries specified in the offer
document. The investment of these funds is limited to specific industries like Info
tech, FMCG, Pharmaceuticals, etc.

 Index Schemes
In this scheme, the funds collected by mutual funds are invested in shares forming the
Stock Exchange Index.
Example- Nifty Index Scheme of UTI Mutual Fund and Sensex Index Scheme of
Tata Mutual Fund
 Sectorial Schemes

Sectorial funds are those mutual funds that invest in a particular sector of the market,
e.g. banking, information technology, etc. Sector funds are riskier than equity
diversified funds since they invest in shares belonging to a particular sector which
gives them fewer diversification opportunities

In summary, mutual funds offer a wide range of investment options to suit different
investor needs and risk preferences. It is important for investors to carefully
consider each fund's investment objective, asset allocation, and fees before making
an investment decision.

What are the advantages and disadvantages of mutual

funds?

Mutual funds offer several advantages and disadvantages that investors should
consider before investing. Some of the key advantages of mutual funds are;

Advantages

1. Diversification: Mutual funds invest in a diversified basket of securities, which

reduces the risk of loss due to the poor performance of a single security.

2. Professional management: Mutual funds are managed by professional fund

managers who have expertise in selecting and managing securities. This can be
especially beneficial for investors who do not have the time or expertise to manage
their own portfolio.

3. Easy accessibility: Mutual funds can be bought and sold through brokerage firms,
financial advisors, or directly from the fund company, making them easily
accessible to most investors.

4. Liquidity: Mutual funds can be bought and sold on any business day, making
them a highly liquid investment.

5. Low minimum investment: Many mutual funds have low minimum investment
requirements, making them accessible to investors with limited funds.

However, mutual funds also have some disadvantages that investors should be aware
of:
 Disadvantages:

1. Fees: Mutual funds charge fees, including management fees, administrative fees,
and other expenses, which can reduce returns.

2. Lack of control: Investors in mutual funds have little control over the selection of
individual securities in the fund, which may not align with their personal investment
goals or values.

3. Tax implications: Mutual funds are subject to capital gains taxes when securities
are sold within the fund, which can result in tax liabilities for investors.

4. Market risk: Like any investment, mutual funds are subject to market risk, which
means that the value of the securities in the fund can rise or fall based on market
conditions.

5. Over-diversification: Some mutual funds may be over-diversified, which can

reduce the potential for high returns.

In summary, mutual funds offer several advantages and disadvantages that investors
should weigh carefully before investing. While they can provide diversification,
professional management, and easy accessibility, they also have fees, lack of
control, and market risk. Investors should carefully consider their investment goals
and risk tolerance before investing in mutual funds.

What do you understand by hire purchase? What are the

advantages and disadvantages of the hire purchase system?

Hire purchase (HP) is when goods are sold on credit, for which payment is made by
the buyer in installments over a period of time. It is called Hire Purchase System.
It is a type of financing arrangement in which a buyer purchases an asset, such as a
car or furniture, on credit and pays for it in installments over a period of time. The
buyer takes immediate possession of the asset but does not become the legal owner
until the final payment is made. The seller or financier retains the legal ownership of
the asset until the final payment is made.

Advantages of hire purchase:

1. Easy access to credit: Hire purchase allows buyers to purchase an asset without
having to pay the full price upfront. This can be particularly beneficial for people
who do not have the cash available to make a large purchase.

2. Fixed payments: Hire purchase agreements typically have fixed monthly

payments, which can make budgeting easier for buyers.

3. No collateral required: Unlike some other types of financing, hire purchase does
not require collateral, such as a house or car, to secure the loan.

4. Option to own the asset: Once all the payments have been made, the buyer
becomes the legal owner of the asset.

Disadvantages of hire purchase:

1. Higher overall cost: Hire purchase agreements often have higher interest rates
than other forms of financing, which means that buyers may end up paying more for
the asset over time.

2. Ownership only after final payment: Until the final payment is made, the buyer
does not own the asset and cannot sell it or modify it without the seller's permission.

3. Credit risk: If the buyer defaults on payments, the seller may repossess the asset
and the buyer may lose all the payments made up to that point.

4. Limited flexibility: The terms of the hire purchase agreement are usually fixed
and cannot be changed, so buyers may not be able to make changes to the agreement
if their circumstances change.

In summary, hire purchase can be a good way for buyers to purchase assets without
having to pay the full price upfront. However, it also has some disadvantages, such
as higher overall cost and limited flexibility. Buyers should carefully consider their
options and compare the terms and costs of hire purchase agreements with other
forms of financing before making a decision.

Explain the difference between leasing and hire purchase

 OWNERSHIP
  Lease the ownership lies with the lesser. The lessee has the right to use
the equipment and does not have the option to purchase

 Hire purchase, the has the option to purchase. The hirer becomes the
owner of the asset/ equipment immediately after the last installment
Leasing and hire purchase are two different methods of financing the
purchase of an asset. The main difference between the two is the
ownership of the asset at the end of the financing period.

 METHOD OF FINANCING

 Leasing is a method of financing business assets only

 Hire purchase is a method of financing both business assets and consumer

articles.

 DEPRECIATION

 In leasing, depreciation and investment allowance can be claimed as an

expense by the lesser.
 In hire purchase depreciation and investment allowance can be claimed
by the hirer.
 TAX BENEFITS

 In leasing, the entire lease rental is tax deductible expense

 Only the interest components of the hire purchase installments are tax-
deductible

 SALVAGE VALUE
The lessee, not being the owner of the assets, and not enjoy the salvage value of
the asset but in hire purchase the hirer, in purchase being the owner of assets and
enjoy the salvage value of assets.

 DEPOSIT The lessee is not required to make any deposits. But the hirer is
required to deposit 20% of the cost.
 MAINTENANCE
The maintenance of leased assets is the responsibility of the lessee Here the cost of
maintenance of hired assets is to be borne by the hirer himself.

 REPORTING
The leased assets are shown by way of footnotes only. The assets on hire purchase
are shown in the balance sheet of the hire.

 DURATION

Lease agreements are done for longer duration and for bigger assets like land,
property etc. Hire Purchase agreements are done mostly for shorter duration and
cheaper assets like hiring a car, machinery, etc.

In a leasing agreement, the financier (lessor) purchases the asset and then leases it to
the customer (lessee) for a specified period of time in exchange for regular
payments. At the end of the lease term, the lessee can either return the asset to the
lessor, extend the lease, or purchase the asset for a predetermined residual value.

On the other hand, hire purchase is a financing agreement where the customer
(hirer) agrees to purchase an asset from the financier (hirer) by paying regular
installments over a fixed period of time. Unlike leasing, the hirer is considered the
owner of the asset from the beginning of the financing period but the financier has a
charge over the asset until the final payment is made. Once all the payments have
been made, the hirer takes full ownership of the asset.

In summary, leasing is a way to use an asset without owning it, while hire purchase
is a way to finance the purchase of an asset over time with the goal of eventually
owning it.

What do you understand by credit rating? Explain the

process of credit rating in brief.

Definition: Credit rating is an analysis of the credit risks associated with a financial
instrument or a financial entity. It is a rating given to a particular entity based on the
credentials and the extent to which the financial statements of the entity are sound, in
terms of borrowing and lending that has been done in the past.
Usually, is in the form of a detailed report based on the financial history of
borrowing or lending and credit worthiness of the entity or the person obtained from
the statements of its assets and liabilities with an aim to determine their ability to
meet the debt obligations. It helps in assessment of the solvency of the particular
entity. These ratings based on detailed analysis are published by various credit
rating
agencies like Standard & Poor's, Moody's Investors Service, and ICRA, to name a
few.

The credit rating process is when a credit rating agency (preferably a third party)
takes details of a bond, stock, security, or company and analyses them to rate them
so that everyone else can use those ratings to use them as investments.

Credit rating agencies assess the borrower's financial history, creditworthiness, and
ability to pay back the loan on time. The credit rating is expressed as a letter grade
or a numerical score. Credit rating agencies use a variety of factors to determine the
credit rating of a borrower. These factors include the borrower's credit history,
income, debt-to-income ratio, employment history, and other financial information.
The credit rating agencies also consider the borrower's industry, economic
conditions, and other external factors that may affect the borrower's ability to repay
the loan. The credit rating agencies assign a letter grade or a numerical score to the
borrower based on their creditworthiness. The highest credit rating is AAA or Aaa,
which indicates that the borrower has an excellent credit history and is very likely to
repay the loan on time. The lowest credit rating is D, which indicates that the
borrower is in default and has not repaid the loan. Credit rating is important because
it helps lenders to assess the risk of lending money to a borrower. Lenders use credit
ratings to determine the interest rate they will charge on the loan. Borrowers with a
high credit rating are more
likely to receive a lower interest rate, while borrowers with a low credit rating may
be charged a higher interest rate or may not be approved for the loan at all.

How credit rating agencies provide ratings. Explain the

ratings in brief.

Credit rating agencies provide ratings by analyzing the financial information of the
borrower and assigning a credit rating based on their creditworthiness. The credit
rating agencies use a standardized rating system to provide ratings to the borrowers.
The most common rating system used by credit rating agencies is the letter grade
system. The letter grade system ranges from AAA or Aaa (highest credit rating) to D
(lowest credit rating). The credit rating agencies assign a letter grade based on the
borrower's ability to repay the loan on time. The following is a brief explanation of
the credit rating system: - AAA or Aaa: This is the highest credit rating and indicates
that the borrower has an excellent credit history and is very likely to repay the loan
on time. - AA or Aa: This credit rating indicates that the borrower has a very good
credit history and is likely to repay the loan on time. - A or A-: This credit rating
indicates that the borrower has a good credit history and is likely to repay the loan on
time. - BBB or Baa: This credit rating indicates that the borrower has an adequate
credit history and is likely to repay the loan on time, but there may be some risk
involved. - BB or Ba: This credit rating indicates that the borrower has a below-
average credit history and there is a higher risk of default. - B or Caa: This credit
rating indicates that the borrower has a poor credit history and there is a very high
risk of default. - CCC or Ca: This credit rating indicates that the borrower has a very

Explain the process of venture capital in brief.

Venture capital is a type of private equity financing that is provided to early-stage,

high-growth companies with the potential to become successful businesses. Venture
capital firms invest in these companies in exchange for an ownership stake, typically
in the form of equity or convertible debt.

Venture capital firms typically invest in companies that are in the early stages of
development, before they have a proven business model or generate significant
revenue. The goal of venture capital is to provide funding to these companies so
they
can develop their products or services, expand their operations, and eventually
become profitable.

Stages in Venture capital

Venture capital is a form of funding that pools together cash from investors and
lends it to emerging companies and startups that the funds believe have the potential
for long-term growth. Venture capital investments typically involve high risk in
exchange for potentially high reward. Because every company is different, the
various stages can vary somewhat from financing to financing. Generally speaking,
though, there are five typical stages of any venture capital financing.

The Seed Stage or Seed money

Venture capital financing starts with the seed-stage when the company is often little
more than an idea for a product or service that has the potential to develop into a
successful business down the road. Entrepreneurs spend most of this stage
convincing investors that their ideas represent a viable investment opportunity.
Funding amounts in the seed stage are generally small, and are largely used for
things like marketing research, product development, and business expansion, with
the goal of creating a prototype to attract additional investors in later funding rounds.
The Startup Stage
In the startup stage, companies have typically completed research and development
and devised a business plan, and are now ready to begin advertising and marketing
their product or service to potential customers. Typically, the company has a
prototype to show investors, but has not yet sold any products. At this stage,
businesses need a larger infusion of cash to fine tune their products and services,
expand their personnel, and conducting any remaining research necessary to support
an official business launch.

The First Stage or the first round stage

Sometimes also called the “emerging stage,” first stage financing typically coincides
with the company’s market launch, when the company is finally about to start seeing
a profit. Funds from this phase of a venture capital financing typically go to actual
product manufacturing and sales, as well as increased marketing. To achieve an
official launch, businesses usually need a much bigger capital investment, so the
funding amounts in this stage tend to be much higher than in previous stages.

The Second round stage or Expansion Stage

Also commonly referred to as the second or third stages, the expansion stage is
when the company is seeing exponential growth and needs additional funding to
keep up with the demands. Because the business likely already has a commercially
viable product and is starting to see some profitability, venture capital funding in the
emerging stage is largely used to grow the business even further through market
expansion and product diversification.

The Third stage

Also called Mezzanine financing, this is expansion money for a newly profitable
company.

The Fourth stage or Bridge Stage

The final stage of venture capital financing, the bridge stage is when companies
have reached maturity. Funding obtained here is typically used to support activities
like mergers, acquisitions, or IPOs. The bridge state is essentially a transition to the
company being a full-fledge-edged, viable business. At this time, many investors
choose to sell their shares and end their relationship with the company, often
receiving a significant return on their investments.

What are the characteristic of venture capital?

The characteristics of venture capital include:

1. High risk, high reward: Venture capital investments are high risk, as they are
typically made in companies that are in the early stages of development and may not
have a proven business model or generate significant revenue. However, successful
investments in high-growth companies can generate significant returns for venture
capital firms and their investors.

2. Long-term investment horizon: Venture capital investments are long-term, often

spanning several years, as it can take time for early-stage companies to develop their
products or services and grow their businesses.

3. Equity or convertible debt: Venture capital firms typically invest in companies in

exchange for an ownership stake, either in the form of equity or convertible debt.
4. Active involvement: Venture capital firms often take an active role in the
companies they invest in, providing strategic guidance, mentorship, and connections
to potential customers, partners, and investors.

5. Focus on high-growth companies: Venture capital firms typically invest in

companies with the potential for high growth, as they are looking for investments
that can generate significant returns.

6. Limited liquidity: Venture capital investments are illiquid, meaning that it can be
difficult to sell the investment or receive a return on the investment until the
company is sold or goes public.

7. Limited partner structure: Venture capital firms typically have a limited partner
structure, where a group of investors pool their capital to invest in the fund, and the
fund managers make the investment decisions on behalf of the investors.

Explain the advantages and disadvantages of venture

capital.

Advantages of Venture Capital:

1. Access to Capital: Venture capital provides businesses with access to capital that
they may not be able to obtain through traditional means, such as bank loans or
public offerings.

2. Strategic Guidance: Venture capital firms often provide strategic guidance and
mentorship to the companies they invest in, helping them to develop their products
and services, build their teams, and scale their businesses.

3. Industry Connections: Venture capital firms often have extensive industry

connections, which can help companies gain access to potential customers, partners,
and investors.

4. High Potential Returns: Venture capital investments have the potential to generate
significant returns for both the venture capital firm and the company, if the company
is successful.
Disadvantages of Venture Capital:

1. Loss of Control: Venture capital firms often require an ownership stake in the
company in exchange for their investment, which can result in the loss of control for
the founders and management team.

2. High Cost of Capital: Venture capital investments can be expensive, as venture

capital firms typically require a high rate of return on their investment.

3. Potential for Conflict: The interests of the venture capital firm and the company
may not always align, and conflicts can arise between the two parties.

4. Limited Liquidity: Venture capital investments are illiquid, meaning that it can be
difficult to sell the investment or receive a return on the investment until the
company is sold or goes public.

5. High Risk: Venture capital investments are high risk, as many of the companies
that receive venture capital funding will ultimately fail.

What do you understand by housing finance?

Housing finance refers to the financial mechanisms and institutions that enable
individuals and organizations to buy, sell, and invest in residential property.
Housing finance typically involves the use of mortgages, which are loans secured by
real estate. These mortgages are typically provided by banks, credit unions, and
other financial institutions.

The process of obtaining a mortgage typically involves an assessment of the

borrower's creditworthiness and ability to repay the loan, as well as an appraisal of
the property being purchased. The terms of the mortgage, including the interest rate
and repayment schedule, will depend on various factors, including the borrower's
creditworthiness, the lender's policies, and prevailing market conditions.

Housing finance also includes other financial products and services related to
residential property, such as home equity loans and lines of credit, refinancing, and
mortgage insurance. Governments may also play a role in housing finance, through
programs designed to provide affordable housing and support homeownership.
 What are the objectives and functions of NHB?

The National Housing Bank (NHB) is a statutory body established under the
National Housing Bank Act, of 1987. The primary objective of NHB is to promote
housing finance institutions and to provide financial and other support to these
institutions.

The specific objectives of NHB include:

1. Regulating and supervising housing finance companies (HFCs) in India to ensure

that they comply with the necessary prudential norms and standards.

2. Providing refinance facilities to HFCs to enable them to extend credit to

individuals and organizations for the purpose of housing.

3. Mobilizing resources from the market to provide long-term finance to HFCs for
housing finance.

4. Undertaking various developmental functions such as research and development,

training and capacity building, technical assistance, and consultancy services to
promote the housing sector in India.

5. Promoting the development of affordable housing by providing financial

assistance to HFCs for this purpose.

6. Monitoring the progress of housing projects financed by HFCs to ensure that they
are completed on time and meet the necessary quality standards.

Overall, the objective of NHB is to promote the housing sector in India by providing
financial and regulatory support to the housing finance institutions, and by
promoting the development of affordable housing.

The National Housing Bank (NHB) is a statutory body established under the
National Housing Bank Act, 1987. The functions of NHB are as follows:

1. Regulation and supervision of housing finance companies: NHB regulates and

supervises housing finance companies (HFCs) in India to ensure that they comply
with the necessary prudential norms and standards.

2. Refinancing: NHB provides refinance facilities to HFCs to enable them to extend

credit to individuals and organizations for the purpose of housing.
3. Resource mobilization: NHB mobilizes resources from the market to provide
long- term finance to HFCs for housing finance.

4. Developmental functions: NHB undertakes various developmental functions such

as research and development, training and capacity building, technical assistance,
and consultancy services to promote the housing sector in India.

5. Promotion of affordable housing: NHB promotes the development of affordable

housing by providing financial assistance to HFCs for this purpose.

6. Monitoring of housing projects: NHB monitors the progress of housing projects

financed by HFCs to ensure that they are completed on time and meet the necessary
quality standards.

7. Formulation of policies and guidelines: NHB formulates policies and guidelines

for the housing sector in India and provides technical support to the government in
this regard.

8. Dissemination of information: NHB disseminates information related to the

housing sector in India to various stakeholders, including HFCs, the government,
and the general public.

Overall, the functions of NHB are geared towards promoting the housing sector in
India by providing regulatory and financial support to HFCs, promoting the
development of affordable housing, and undertaking various developmental
functions to enhance the capacity of the housing sector.

Explain the mechanism of factoring.

In finance, factoring refers to a type of financing where a company sells its

accounts receivable (invoices) to a third-party financial company, known as a
factor, at a discount in exchange for immediate cash. The factor will then collect
the payments from the company's customers on the invoices.

The mechanism of factoring is summed up below:

i. An agreement is entered into between the selling firm and the firm. The
agreement provides the basis and the scope of understanding reached between
the two for rendering factor service.
ii. The sales documents should contain the instructions to make payment directly
to the factor who is assigned the job of collection of receivables.
iii. When the payment is received by the factor, the account of the firm is
credited by the factor after deducting its fees, charges, interest etc. as agreed.
iv. The factor may provide advance finance to the selling firm conditions of the
agreement so require.

The mechanism of factoring in finance involves several steps:

1. The company sells its accounts receivable (invoices) to the factor at a

discount. The factor provides immediate cash to the company, typically up to 80-
90% of the invoice value.

2. The factor assumes the risk of collecting payments from the company's
customers. The factor will typically perform credit checks on the customers and
may take on the responsibility of collecting the payments.

3. The factor collects payments from the customers and deducts its fee, which is
typically a percentage of the invoice value, before remitting the remaining
amount to the company.

4. The company receives the remaining amount from the factor, less the factor's
fee.

Factoring can provide several benefits to companies, including improved cash

flow, reduced credit risk, and increased flexibility in managing their finances.
However, it can also be an expensive form of financing, as factors typically
charge higher fees than traditional lenders. Therefore, companies should
carefully consider the costs and benefits of factoring before deciding to use this
financing method.

What are advantages and disadvantages of factoring?

Advantages of factoring in finance include:

1. Improved cash flow: Factoring provides immediate cash flow to the company
by converting accounts receivable into cash, which can be used for working
capital, paying bills, and investing in growth opportunities.
 2. Reduced credit risk: By selling their accounts receivable, companies can
transfer the credit risk associated with non-payment to the factor, which can help
protect against bad debt losses.

3. Speed and convenience: Factoring is generally faster and more convenient

than traditional financing methods, such as bank loans, which can involve
lengthy application processes and collateral requirements.

4. Access to expertise: Factors often have expertise in credit management and

collections, which can be beneficial to companies that are struggling with these
areas.

Disadvantages of factoring in finance include:

1. Cost: Factoring fees can be high, especially for non-recourse factoring, which
involves more risk for the factor.

2. Loss of control: When a company sells its accounts receivable, it loses control
over the collection process and customer relationships, which can be a
disadvantage for some companies.

3. Negative impact on credit rating: If customers become aware of the factoring

arrangement, it could have a negative impact on the company's credit rating and
reputation.

4. Limited availability: Factoring may not be available or appropriate for all

companies, as it typically requires a certain level of accounts receivable volume
and creditworthiness of the customers.

5. Legal and regulatory issues: Factoring can be subject to legal and regulatory
issues, such as usury laws, disclosure requirements, and potential disputes over
payment.

Explain each type of factoring in brief.

 Factoring may broadly be defined as the relationship, created by an agreement,
between the seller of goods/services and a financial institution called the factor,
whereby the latter purchases the receivables of the former and also controls and
administers the receivables of the former.

Factoring (also known as accounts receivable financing or invoice financing) is a

type of financing where a company sells its accounts receivable (i.e., the money
owed to the company by its customers for goods or services sold on credit) to a
third-party financial institution (known as a factor) at a discounted price. This
allows the company to receive immediate cash flow instead of having to wait for
customers to pay their invoices.

The factor then takes over the responsibility of collecting payments from the
customers, and once the full amount is collected, the factor pays the company the
remaining balance (minus a fee for the financing). Factoring can be a useful tool for
companies that need to improve their cash flow, especially if they have a lot of
outstanding invoices that are not being paid on time.

Recourse and Non-recourse Factoring

 There are two main types of factoring: recourse and non-recourse. In

recourse factoring, the company is still responsible for the payment if the
customer does not pay the invoice, while in non-recourse factoring, the
factor assumes the risk of non-payment and absorbs the loss if the customer
does not pay. Non-recourse factoring is generally more expensive because
the factor is taking on more risk.

Advance and Maturity Factoring

 Under an advance factoring arrangement, the factor pays only a certain

percentage ( between 75 % to 90 %) of the receivables in advance to the
client, the balance being paid on the guaranteed payment date. As soon as
factored receivables are approved, the advance amount is made available to
the client by the factor. The Factor charges discount/interest on the advance
payment from the date of such payment to the date of actual collection of
receivables by the factor

 In case of maturity factoring, no advance is paid to client and the payment is

made to the client only on collection of receivables or the guaranteed
payment data as the case may be agreed between the parties. Thus, maturity
factoring consists of the sale of accounts receivables to a factor with no
payment of advance funds at the time of sale.

Conventional or Full Factoring

 Under this system the factor performs almost all services of collection of
receivables, maintenance of sales ledger, credit collection, credit control and
credit insurance. The factor also fixes up a draw limit based on the bills
outstanding maturity wise and takes the corresponding risk of default or
credit risk and the factor will have claims on the debtor as also the client
creditor. It is also known as Old Line Factoring.
 Factoring agencies like SBI Factors are doing full factoring for good
companies with recourse.

Domestic and Export Factoring

  The basic difference between domestic and export factoring is on
account of the number of parties involved.

 In domestic factoring, three parties are involved, namely:

1. Customer (buyer)
2. Client (seller)
3. Factor (financial intermediary)

All three parties reside in the same country.

Export factoring is also termed as cross-border/international factoring and is almost

similar to domestic factoring except that there are four parties to the factoring
transaction. Namely, the exporter (selling firm or client), the importer or the
customer, the export factor and the import factor.

Since two factors are involved in export factoring, it is also called a two-factor
system of factoring.

Two-factor system results in two separate but inter-related contracts:

1. between the exporter (client) and the export factor.
2. Export factor and import factor.

Limited Factoring

• Under limited factoring, the factor discounts only certain invoices on selective
basis and converts credit bills into cash in respect of those bills only.

Selected Seller Based Factoring

• The seller sells all his accounts receivables to the factor along with invoice
delivery challahs, contracts etc. after invoicing the customers.
• The factor performs all functions of maintaining the accounts, collecting the
debts, sending reminders to the buyers and does all consequential and incidental
functions for the seller.
• The sellers are normally approved by the factor before entering into factoring
agreement
Disclosed and Undisclosed Factoring
• In disclosed factoring, the name of the factor is mentioned in the invoice by the
supplier telling the buyer to make payment to the factor on due date.
• However, the supplier may continue to bear the risk of bad debts (i.e. non-
payments) without passing to the factor.
• The factor assumes the risk only under nonrecourse Factoring agreements.
• Generally, the factor lays down a limit within which it will work as non-
recourse. Beyond this limit the dealings are done on recourse basis i.e. the seller
bears the risk.

Explain functions of factoring in brief.

The purchase of book debts or receivables is central to the function of factoring

permitting the factor to provide basic services such as:

 Administration of sellers’ sales ledger.

 Collection of receivables purchased.
 Provision of finance.
 Protection against risk of bad debts/credit control and credit protection.
 Rendering advisory services by virtue of their experience in financial
dealings with customers.

1. Providing immediate cash flow: Factoring allows companies to convert their

accounts receivable into cash, which can be used to meet short-term financial
obligations, such as paying bills, investing in inventory, or funding growth
opportunities.

2. Reducing credit risk: Factoring can help companies reduce their credit risk by
transferring the risk of non-payment to the factor. This can protect against bad
debt losses and improve the company's financial stability.

3. Managing collections: Factors often have expertise in credit management and

collections, which can be beneficial to companies that are struggling with these
areas. Factors can help companies establish credit policies, monitor customer
payment patterns, and collect payments in a timely manner.
4. Improving efficiency: Factoring can help companies improve their efficiency
by reducing the time and resources needed for credit management and
collections. This can allow companies to focus on their core business activities,
such as sales and marketing.

5. Providing working capital: Factoring can provide companies with working

capital that can be used to fund operations, invest in growth opportunities, or pay
down debt.

Overall, factoring can be a useful tool for companies that need to improve their
cash flow, manage credit risk, and streamline collections. It can also provide
access to expertise and working capital that can help support growth and
expansion.