Sources of Financing

Long term sources of finance broadly

categorized in to 2 types;
1. Owned ownership capital(Share capital &
Retained earnings)
2. Debt Capital(Debentures)
 Shares
• A share is a small units of capital of a
company. In other words , share capital of a
company is divided in to no. of equal parts
that is knows as Shares.
Kinds of Shares: Equity Shares
Preference Shares
 Equity Shares
• Equity shares are the main source of finance of a firm.
• It is issued to the general public.
• Equity share­holders do not enjoy any preferential
rights with regard to repayment of capital and dividend.
• They are entitled to residual income of the company,
• They enjoy the right to control the affairs of the
business
• All the shareholders collectively are the owners of the
company.
 Equity Shares
Features:
1. They are permanent in nature.
2. Equity shareholders are the actual owners of the company
3. Equity shares are transferable, i.e. ownership of equity shares can
be transferred with or without consideration to other person.
4. Voting rights/ right to control
5. Dividend payable to equity shareholders is an appropriation of
profit.
6. Equity shareholders do not get fixed rate of dividend
7. The liability of equity shareholders is limited to the extent of their
investment.
 Merits of Eq.Shares
• To the Company • To the Investors
1. It is permanent long term 1. Eq shares provides
source of finance more income
2. There is no repayment 2. Right to participate in
liability
control & mgt of the
3. It does not create any company
obligations to pay
dividend 3. Capital
4. It increase the credit appreciations(when
worthiness of the share price increases)
company 4. Voting rights
 Demerits
To the Company To the Investors
1. High cost sources of 1. No guarantee,
funds regularity of receipt of
2. No tax advantages demand
3. Issue of additional 2. No guarantee of
shares dilutes control receipt of principal
amount of investment
3. Loss of capital due to
fluctuations in the
share price
 Preference Share Capital
Features:
1. It carries fixed rate of dividends
2. Pre. Dividends is not tax deductible
3. Pre. Dividends are payable only After Tax
profit(PAT)
4. Normally does not have voting rights
 Types
• Cumulative Pref shares
• Non cumulative Pref shares
• Redeemable Pref shares
• Irredeemable Pref shares
• Participatory Pref shares
• Non Participatory Pref shares
• Convertible Pref shares
• Non Convertible Pref shares
 Merits
To the company • To the Investors
1. No legal obligations to 1. Stable rate of dividend
pay dividend 2. Prior claim on assets
2. No voting rights(so less 3. Less risk compare to
control over the Eq. shares
company)
3. It increase the credit
worthiness
4. Long term capital of the
company
 Demirits
To company To Investors
1. Tax disadvantages 1. No voting rights
2. Permanent burden of 2. Rate of dividend
payment of dividend generally less
 Debentures
Features:
1. Fixed rate of interest
2. Tax deductible
3. Redemption
4. Securing interest
5. Convertible
6. Claim on income & assets
 Types of Debentures
• Redeemable Deb
• Irredeemable Deb
• Convertible Deb
• Non Convertible Deb
• Secured/Mortgaged Deb
• Un secured/Naked/Simple Deb
 Merits
To the Company To the Deb Holders
1. Cheapest source of long 1. Fixed, regular & Stable
term finance income
2. Doesn’t dilute the control
2. Investment in Deb is
3. Deb holders do not
safe & secured
participate in the surplus
profit 3. Deb are issued for a
4. Deb capital provides definite maturity.
protection against
inflation (Interest rate is
fixed)
 Demerits
• Raising deb capital is risky (it involves payment
of fixed interest)
• Deb do not carry any voting rights
• Deb holders do not have claim on surplus
profit (bcs they are not owners)
• Receipt of deb is fully taxable under the head
Income from Other Sources
 Term Loans
• Term loans which are obtained directly from
the banks & financial institutions
Features:
1. Maturity
2. Direct Negotiations
3. Security
4. Convertibility
5. Repayment schedule
 Lease Financing

• Lease financing is a contractual agreement between the

owner of the assets (lessor) and user of the assets
(lessee), whereby the owner permits the user to
economically use the asset on the payment of periodical
amount which is in the form of lease rent for a specific
period of time.
• Lease financing is one of the important sources of
medium- and long-term financing where the owner of an
asset gives another person, the right to use that asset
against periodical payments. The owner of the asset is
known as lessor and the user is called lessee.
 HYBRID FINANCING

• Hybrid Financing is the financial instrument

that partakes some characteristics of debt and
some characteristics of equity. Simply, it is the
financial security that possesses the
characteristics of both the debt and equity.
• It can be defined as a combined face of equity
and debt. This means that the characteristics
of both equity and bond can be found in
Hybrid Financing.
 Types of HYBRID FINANCING

• Warrants
• Convertibles
 WARRANTS

• A warrant entitles the purchase to buy a fixed

number of ordinary shares, at a particular
price, during a specified time period. Warrants
are issued along with debentures as
‘sweeteners’.
• Warrants: gives its holder the right to subscribe
to the equity shares’ of a company during a
certain period at a specified price.
 CONVERTIBLES DEBENTURES

• Convertible debentures: is a debenture that is convertible,

partially or fully, into equity shares.
• It is debenture that can be changed into a specified number
of ordinary shares, at the option of the owner.
• The most notable feature of this debenture is that it
promises a fixed income associated with debenture as well
as change of capital gains associated with equity share.
• Because of this combination of fixed income and capital
gains in the convertible debenture, it has been called a
hybrid security.
 PRIVATE EQUITY

• Private equity is an alternative investment class and

consists of capital that is not listed on a public exchange.
• Private equity is composed of funds and investors that
directly invest in private companies, or that engage
in buyouts of public companies, resulting in
the delisting of public equity.
• Institutional and retail investors provide the capital for
private equity, and the capital can be utilized to
fund new technology, make acquisitions, expand
working capital, and solidify a balance sheet. 
 VENTURE CAPITAL

• Venture capital is a form of

private equity and a type of financing that
investors provide to startup companies and
small businesses that are believed to have
long-term growth potential. 
• Venture capital generally comes from well-
off investors, investment banks and any other
financial institutions.
• Venture capitalists are willing to risk investing
in such companies because they can earn a
massive return on their investments if these
companies are a success.
• This could be funding startup ventures or
supporting small companies that wish to
expand but do not have access to equities
markets.
 ANGEL FINANCING

• Angel investors are most often individuals

rather than companies.
• An angel investor provides financial backing
to entrepreneurs and early stage businesses,
or start-ups.
• The capital that angels provide can be a single
injection of funds or ongoing financial backing
via a series of investments.
• An angel investor (also known as a private
investor, seed investor or angel funder) is a
high net worth individual who provides
financial backing for
small startups or entrepreneurs, typically in
exchange for ownership equity in the company.
• Often, angel investors are found among an
entrepreneur's family and friends.
THANK YOU