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8/4/2019 Sources of Finance(2)
http://slidepdf.com/reader/full/sources-of-finance2 1/21
Sources Of Finance
Objective
To know about Various sources offinance
8/4/2019 Sources of Finance(2)
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Finance Meaning
Finance – Money
Life blood of every activity or business
8/4/2019 Sources of Finance(2)
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For an Individual
Salary Income
Loans from
Friends
Company and
Banks
8/4/2019 Sources of Finance(2)
http://slidepdf.com/reader/full/sources-of-finance2 4/21
Why business need Money?
• To Start up
• To Expand
• To relocate
• To takeover
• To Replace
• To employ more staff
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8/4/2019 Sources of Finance(2)
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Factors Affecting Demand for Finance
Objectives
Risks
Colleteral offered
Time Factors
Legal Status of business
Financial Status of the firm
Economic Climate
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Sources
of Finance
Internal
Profit
(RE)
Working
CapitalSale of
Assets
External
Short
term
Over Draft
Loans
Trade Credit
Factoring
Longterm
Loans
Mortgage
Debentures
Venture
Capital
8/4/2019 Sources of Finance(2)
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Internal Sources of Finance
• Sources
Personal Savings (Sweat Equity)
Profit (retained earnings)
Reduced working Capital
Sale of assets and lease back
Cash at bank
Owners investment Reduce stock levels
Delay payment to creditors
8/4/2019 Sources of Finance(2)
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Term of Finance
Short term finance (up to one year)
Cash at bank
Trade Credit
Delaying payment to creditors
Medium term finance (1 – 3 yers)
Retained earnings
Sale of assets Long term finance
Owner’s investment
8/4/2019 Sources of Finance(2)
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Long Term Finance
A business requires funds to purchase fixedassets like land and building, plant andmachinery, furniture etc.
The capital required for these assets is calledfixed capital.
Purpose of long term finance:
To Finance fixed assets To finance the permanent part of working
capital
To finance growth and expansion of
business
8/4/2019 Sources of Finance(2)
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Factors determining long-term
financial requirements
Nature of Business
Nature of goods produced
Technology used
8/4/2019 Sources of Finance(2)
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Sources of long term finance
Shares
Debentures
Public Deposits
Retained earnings
Term loans from banks
Loan from financial institutions
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Retained Earnings
The percentage of net earnings not paidout as dividends, but retained by thecompany to be reinvested in its core business
or to pay debt. It is recorded undershareholders' equity on the balance sheet.
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Merits
Cheap Source of Capital
Financial stability
Benefits to the shareholders
Limitations
Huge Profit
Dissatisfaction among shareholders
Fear of monopoly
Mis-management of funds
8/4/2019 Sources of Finance(2)
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External Sources of Finance
Loans
Over Draft
Loan
Debentures
Share Capital
Factoring Debts
Lease
Hire Purchase
Mortgage
Venture Capital
8/4/2019 Sources of Finance(2)
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Share Capital
Meaning of Share Capital:
Share capital denotes the amount of capitalraised by the issue of shares, by a company. It
is collected through the issue of shares andremains with the company till its liquidation.
shareholder are the owners of the company
The total share capital is divided into small
parts and each part is called a share. Share is the smallest part of the total capital of
a company
8/4/2019 Sources of Finance(2)
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Types of Shares
Equity shares
Preference Shares
Features:
Preference in dividends.
Preference in assets in the eventof liquidation.
Convertible into common stock. Callable at the option of the corporation.
Nonvoting.
8/4/2019 Sources of Finance(2)
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Types of Preference Shares
Cumulative or Non-cumulative
Redeemable and Non- Redeemable
Participating Preference Share or non-
participating preference shares
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8/4/2019 Sources of Finance(2)
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The “Secrets” to Successful Financing
1. Choosing the right sources of capital is adecision that will influence a company for alifetime.
2. The money is out there; the key is knowingwhere to look.
3. Creativity counts. Entrepreneurs have to beas creative in their searches for capital as theyare in developing their business ideas.
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4. The World Wide Web puts at entrepreneur’sfingertips vast resources of information thatcan lead to financing.
5. Be thoroughly prepared before approachinglenders and investors.
6. Entrepreneurs should not underestimate theimportance of making sure that the
“chemistry” between themselves, their companies, and their funding sources is agood one.