Sources of finance

Financial Management

1. Sources of Finance Dr. Sunita Sukhija Assistant Professor in Commerce Govt. National College, Sirsa (HRY)

2. Business simply cannot function without  money , and the money required to make a business function is known as business funds. Throughout the life of business, money is required continuously. Sources of funds are used in activities of the business. They are classified based on time period, ownership and control, and their source of generation.

3. Finance is the major part in running a firm. Distribution of finance to each and every department is based upon the requirements of that department and the situation of the business. Requirement of finance can be broadly classified into following − Long term or fixed capital financial requirement. Short-term or working capital requirement. Sources of finance shows the mobilization of funds for their requirement. To meet their long term and short term requirements firm needs amounts to meet their requirements. Based on mobilization of funds various sources are classified as below

4. Sources of Finance DIFFERENT FINANCIAL NEEDS OF BUSINESS : Long Term Financial needs: 5-10 years All investment in plant and machinery and permanent and hardcore working capital Medium Term Financial Needs : more than 1 year but less than 5 years Example – differed revenue expenditure, Special projects , Working capital for Special orders etc . Short Term financial needs : less than 1 year typically to finance working capital such as stocks debtors etc .

5. Basic Principle LONG TERM REQUIREMENTS SHOULD BE FUNDED THROUGH LONG TERM SOURCES SHORT TERM REQUIREMENTS THROUGH SHORT TERM SOURCES

6. Sources of long term Finance Equity Share Capital (including premium) Preference Share Capital Retained Earnings Bonds and Debentures Loans from Financial Institutions ( Central,State , Development andSpecific )

7. Equity Share Capital Equity shares is the most important source of raising long term capital by a company. Equity shares represent the ownership of a company and thus the capital raised by issue of such shares is known as ownership capital or owner’s funds. Features of ESC: Residual Claim on Income Residual Claim on Assets Right to Control Pre-Emptive Right Limited Liability

8. Preference Share Capital Preference share capital carry preferential rights over equity in terms of dividend and return of capital . This capital carry fixed rate of dividend. Features of PSC Claim on Income Claim on Assets Fixed Dividend No Controlling Power Cumulative/Redemption/Convertible/Participatory

9. Debenture Debenture is a certificate issued by a company under its seal acknowledging a debt due by its to its holder. Funds acquired by issue of debenture represent loan taken by company is known as debt capital.ome Features of Debenture : Claim on Income Claim on Assets Fixed rate of interest No controlling Power Cheap source of Finance Maturity

10. Retained Earnings It is also called internal Financing. Retained earning is made by transferring part of profit to various reserves i.e. General Reserve, Reserve Fund, Replacement Fund Feartures of R.E. Cheap Source Make Company Self Independent Increase the Creditworthiness Help to pay long term Liabilities Help to make Balanced Dividend Policy

11. Loan from Financial Institutions Govt. has established many financial institiutions which provide long term and medium term loan to industrial Undertakings i.e. IDBI ICICI IFCI IRCI LIC GIC SFCs

12. Short term Finance Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. Short term finances are available in the form of: Trade Credit Cash Credit Short Term Loans like  working capital loan  from Commercial Banks Fixed Deposits for a period of 1 year or less Advances received from customers Creditors Bill Discounting

13. Trade Credit Just as a firm grants credit to its customers it can also get credit from the manufacturers or wholesalers or suppliers. It is known as  trade or mercantile credit . According to Howard and Upton, trade credit may be defined as- “the credit extended by the seller to the buyers at all levels of production and distribution processes down to the retailer”. The usual duration of this credit ranges from 30 to 90 days. It is granted to the company or firm on “Open account” without any security except that of the goodwill and financial standing of the buyer.

14. Cash Credit Cash credit can be defined as an arrangement made by the bank for the clients to withdraw cash exceeding their account limit. The cash credit facility is generally sanctioned for one year, but it may extend up to three years in some cases. In case of special request by the client, the time limit can be further extended by the bank. The extension of the allotted time depends on the consent of the bank and past performance of the client. The rate of interest charged by the bank on cash credit depends on the time duration for which the cash has been withdrawn and the amount of cash.

15. Short term Bank Loan Short-term bank financing plays a key role in the growth of a firm. Frequently during the course of a year there is a period in which cash inflows are not sufficient to meet cash outflow demands. Short-term bank financing is one important vehicle by which a firm can be carried through such periods. This form of financing appears as a note payable on the balance sheet at a specific rate of interest. It is second only to trade credit in importance .

16. Customer Advance Many times the manufacturers or the suppliers insist on, advance by the customers particularly in case of special orders or big orders. The customer advance forms part of the price of the products ordered by him. Some times, the customer also tenders the full price. This is an interest free source of finance. The period of such credit depends upon the time taken to  delivery of goods. The availability of this credit also depends on the following factors: 1. Competitive conditions in the market — If acute competition prevails, the supplier cannot insist the buyer to pay an advance. 2. Customs of the trade and usage. 3. Reputation of the supplier.

17. Bill Discounting/ Factoring Bill Discounting/Factoring comprises complementary financial services, which is provided to the borrowers. The borrower has freedom to select the set of services provided by the factoring enterprise. Factoring is a transaction whereby a business sells its statement of receivable to a factor at a discount rate, to raise fund for financing short-term projects . The factoring services were introduced in India by the State Bank of India Factoring and Commercial Services Ltd. (SBIFACS) on 11 th  April 1991 for financing short-term projects.

18. Thanks