MODULE 2: Sources of Finance

• It is concerned with allocation, procurement, and effective utilization of financial resources to enable a business concern to attain its predetermined objectives relative to growth, stability, profitability, and liquidity.

  Finance
• Long-term Financial Requirement is also known as Fixed Capital Requirement.
• This means the finance needed to acquire land and building for business concern, purchase of plant and machinery and other fixed expenditure.

  Long-term Financial Requirement
• A capital used to purchase the fixed assets of the firms such as land and building.

  Fixed Capital
• Short-term Financial Requirements are popularly known as working capital.
• The firms should need certain expenditure like procurement of raw materials, payment of wages, day-to-day expenditures, etc.

  Short-term Financial Requirements
• Long-term Sources of Finance BASED ON PERIOD:

  • Equity Shares
  • Preference Shares
  • Debenture
  • Long-term Loans
  • Fixed Deposits
• Short-term Sources of Finance BASED ON PERIOD:

  • Bank Credit
  • Customer Advances
  • Trade Credit
  • Factoring
  • Public Deposits
  • Money Market Instruments
• FINANCES ARE Based On:

  • Based on the Period
  • Based on Ownership
  • Based on Sources of Generation
  • Based in Mode of Finance
• An ownership source of finance include:

  • Shares capital, earnings
  • Retained earnings
  • Surplus and Profits
• Borrowed capital include:

  • Debenture
  • Bonds
  • Public deposits
  • Loans from Bank and Financial Institutions
• Internal Sources of Finance

  • Retained Earnings
  • Depreciation Funds
  • Surplus
• External Sources of Finance

  • Share capital
  • Debenture
  • Public deposits
  • Loans from Banks and Financial Institutions
• Security Finance may be including:

  • Shares capital
  • Debenture
• Retained earnings may include:

  • Retained earnings
  • Depreciation funds
• Loan finance may include:

  • Long-term Loans from Financial Institutions
  • Short-term Loans from Commercial Banks
• THREE MAJOR CLASSIFICATIONS OF Sources of Finance

  1. Security Finance
  2. Internal Finance
  3. Loans Finance
• The finance is mobilized through issue of securities such as shares and debenture.

  Security Finance
• TYPES OF SECURITY FINANCE

  1. Ownership Securities
  2. Creditorship Securities
• It is also called as capital stock, commonly called as shares.

  Ownership Securities
• They are the most universal method of raising finance for the business concern.

  Shares
• TYPES OF OWNERSHIP SECURITIES

  • Equity Shares
  • Preference Shares
  • No par stock
  • Deferred Shares
• FEATURES OF EQUITY SHARES

  1. Maturity of the shares
  2. Residual claim on income
  3. Residual claims on assets
  4. Right to control
  5. Voting rights
• Equity shares have permanent nature of capital, which has no maturity period. It cannot be redeemed during the lifetime of the company.

  Maturity of the shares
• Equity shareholders have the right to get income left after paying fixed rate of dividend to preference shareholder. The earnings or the income available to the shareholders is equal to the profit after tax minus preference dividend.

  Residual claim on income
• If the company wound up, the ordinary or equity shareholders have the right to get the claims on assets. These rights are only available to the equity shareholders.

  Residual claims on assets
• Equity shareholders are the real owners of the company. Hence, they have the power to control the management of the company and they have power to take any decision regarding the business operation.

  Right to control
• Equity shareholders have voting rights in the meeting of the company with the help of voting right power; they can change or remove any decision of the business concern. Equity shareholders only have voting rights in the company meeting and also they can nominate proxy to participate and vote in the meeting instead of the shareholder.

  Voting rights
• ADVANTAGES OF EQUITY SHARES

  1. Permanent sources of finance
  2. Voting rights
  3. No fixed dividend
  4. Less cost of capital
  5. Retained earnings
• DISADVANTAGES OF EQUITY SHARES

  1. Irredeemable
  2. Obstacles in management
  3. Limited income to investor
  4. No trading on equity
• Which are more commonly referred to as preferred stock, are shares of a company’s stock with dividends that are paid out to shareholders before common stock dividends are issued.

  Preference Shares
• TYPES OF PREFERENCE SHARES

  1. Cumulative Preference Shares
  2. Non-cumulative Preference Shares
  3. Redeemable Preference Shares
  4. Irredeemable Preference Shares
  5. Participating Preference Shares
  6. Non-Participating Preference Shares
  7. Convertible Preference Shares
  8. Non-convertible Preference Shares
• These have right to claim dividends for those years which have no profits. If the company is unable to earn profit in any one or more years, they are unable to get any dividend but they have right to get the comparative dividend for the previous years if the company earned profit.

  Cumulative Preference Shares
• They have no right to enjoy the above benefits. They are eligible to get only dividend if the company earns profit during the years. Otherwise, they cannot claim any dividend.

  Non-cumulative Preference Shares
• When preference shares have a fixed maturity period, it becomes these shares. It can be redeemable during the lifetime of the company. The Company Act has provided certain restrictions on the return of the redeemable preference shares.

  Redeemable Preference Shares
• They can be redeemed only when the company goes for liquidator. However, there is no fixed maturity period for such kind of preference shares.

  Irredeemable Preference Shares
• They have right to participate extra profits after distributing the equity shareholders.

  Participating Preference Shares
• These shareholders are not having any right to participate extra profits after distributing to the equity shareholders. Fixed rate of dividend is payable to this type of shareholders.

  Non-participating Preference Shares
• They have right to convert their holding into equity shares after a specific period. The articles of association must authorize the right of conversion.

  Convertible Preference Shares
• These shares cannot be converted into equity shares from preference shares

  Non-convertible Preference Shares