Sources of finance
Presented by-
Neeta asnani
Alpana garg
Pratibha arora
Kalpana tewani
Sources of finance
Short term Long term
finance finance
Short term finance
1. Sale of fixed assets
2. Reserves
3. Provision for taxation
4. Accrued expenses
5. Credit papers
6. Customer credit
7. Commercial banks
8. Loans from directors
Long term finance
INTERNAL SOURCES EXTERNAL SOURCES
Equity shares
• Debenture
• Long term loans
Preference shares • Public deposit
Reinvestment of earnings • Bank loans
Personal funds • State financing
Family and friends
• Private lenders
Venture capital
INTERNAL SOURCES
1. EQUITY SHARES
It is also known as ordinary shares , represent the
owners capital in a company.
No preferential right in the payment of dividend or
repayment of capital.
They are the real owners of the company.
Equity sharesholders enjoy the very high rate of
returns.
Enjoy the voting right.
A share is a unit of in the capital of the company.
2.Preference shares
• A fixed rate of dividend is paid on preference
share capital.
• It has to preferential right over equity shares :-
a. They receive dividend prior to the equity share
holders.
b.They have first right to claim repayment of
capital at the time of winding of the company.
It has limited return on investment.
No controlling power .
Hybrid security .
3. Retained earnings
It is the reinvestment of earnings year
after year.
Company can reinvest its undistributed
profits to finance their business needs .
It is also know as self financing.
It can also be used to redeem old debts
and to meet working capital
requirements.
4.Personal funds
• To start up business one has to look for
individual sources i.e. start up capital .
• These include cash ,savings and personal
assets that can be converted to cash.
• Personal funds are good in terms of cost and
control.
• It also attracting from banks , private investor
venture capitalists etc.
5. Family and friends
• They can easily invest due to their relationship with
the owner.
• They provide small amount of equity funding for
new ventures (informal investors)
• They have ownership position in the venture and all
rights of that position.
• Owner should carefully consider the impact of the
investment on the family member or friends before
it is accepted.
6.Venture capital
• Venture capital is a creative
capital
It provides help to
professionals and small
entrepreneurs to launch
their enterprise.
It is closely linked with
innovation and high growth
and profit.
It convert business idea into
commercial venture.
It aims at financing high technology projects.
It is a long- term investment with high degree of risk.
Types of venture capital financing to VC undertaking:-
• Equity Financing:- They requires funds for a longer period
& it is a high risk unit. Equity participation of VC firms does
not exceed 49% of their total equity capital
• Debt Financing:- They don’t have income in the initial stage
so, they find problem to pay interest. In such cases
,conditional loans may be preferred.
7.Debentures
Companies can borrow & raise loans by issuing
it as securities of specified face value.
It carry a fixed rate of interest.
It is a cheaper source of finance since the rate of
interest is lower than the rate of return on shares.
Refund of debt is obligatory at a certain
specified date which is mentioned on the written
agreement.
They get first priority of claim on assets of the
company.
No voting rights.
Management uses this source of finance for
development & expansion of the company.
It is good for those investors who prefer safe
investment with regular income.
Reduction in credit-worthiness of the company
who issues debentures.
8.Long term loans
These are borrowed capital of the companies,
maturity period may be more 6-10 years or
even more.
It is obtained to acquire fixed assets &
working capital.
Long-term loans are collateralized by a
business's assets and typically require
quarterly or derived from profits or cash
flow.
Rate of interest charged by financial institutions
may differ from project to project depending
upon the credit worthiness of the borrower.
Sources of these loans are :
a. Financial institutions like SFC
b. Commercial and corporation bank
c. SIDC
d. DIC
e. Refinance and direct lending from SIDBI
f. NSIC
9.Public deposits
Sometimes, companies raise their funds by inviting their.
shareholders, employees and the general public to deposit
their savings with the firm
Deposits are accepted for meeting the capital needs of the
company.
Advantages
companies can receive funds at lower rate.
lower administrative cost.
requires lesser formalities.
company can pay higher dividends to shareholders by using
this method.
as no securities is offered against public deposits, the
company can use its assets as security to borrow from other
sources.
10.Bank loans
Commercial banks are most important source of medium ,
short and long- term capital.
They provide a wide variety of loans to meet specific
requirements of a concern.
Merits
timely assistance
flexible
not a permanent burden on profits of a firm
very economical
do not interfere in management of firm
high secrecy regarding information of financial position of
the firm.
Types of bank loans
term loans
installment loans
special loans
inventory loans
equipment loans
real estate loans
personal loans
11.State financing
loans obtained from government to develop and
launch innovative idea.
The government lenders include centre, state and
local levels.
State financing is important due to some reasons
small units have weak economic condition
these units have limited access to capital markets
these units are unable to provide sufficient
security to lenders
12.Private lenders
Theses range from banks to finance
companies, from insurance companies
to families.
Loans provided can be short term or
long term.
Private investors may be wealthy
individuals or professional money-
lenders.
Other than money lending , private banks
also provide a host of other services.
Like
professional financial advice
financial references
credit information
transfer of funds
Thank you
