Sources of Finance for Financial Management (FM) Presentation PPT

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1. SOURCES
OF
FINANCE
Team- A
Presented by

2. CONTENTS
SELECTION OF
APPROPRIATE SOURCES
OF FINANCE
SOURCES OF SHORT
TERM FINANCE
EQUITY FINANCING
RAISING EQUITY
RIGHTS ISSUE
HYBRID FINANCING
LONG-TERM LEASE
VENTURE CAPITAL
DEBT FINANCING
CONCLUSION

3. Selection of appropriate sources of finance
Firms need funds to:
Provide working capital
Invest in non-current assets
Criteria for choosing between sources of finance:
A firm must consider the factors such as;
1. Cost
- Debt is usually cheaper than equity.
- Debt interest is tax-deductible; dividends are not.
2. Duration
- Long-term finance tends to be more expensive but offers
security and stability.
- The Matching Principle: long-term assets should be financed
by long-term funds.

4. 3.Term Structure of Interest Rates:
- Short-term finance is typically cheaper but not always.
- Interest rates for different maturities should be
carefully considered.
4.Gearing:
- High gearing (more debt) is cheaper but riskier due to
regular repayments.
- Low gearing (more equity) can dilute earnings per
share if funded by equity.
5.Accessibility:
- Smaller companies may struggle to access equity or
long-term debt.
- Quoted companies find it easier to raise finance due to
liquid shares.

5. FLOWCHART
OF THE
SOURCES OF
FINANCE

6. SOURCES OF SHORT
TERM FINANCE
Bank overdraft:A bank overdraft allows businesses to withdraw more money from
their bank account than they have available, up to a pre-agreed limit. This is useful for
covering short-term cash shortages. For instance, if a company faces unexpected
expenses like emergency repairs, it can use an overdraft to cover these costs temporarily
without needing to secure a formal loan.
Trade credit:Trade credit is a form of short-term finance where suppliers allow
businesses to purchase goods or services and pay for them at a later date. This delay in
payment provides businesses with the flexibility to manage their cash flow more
effectively.

7. Sale and leaseback: is a financial transaction that allows a business to sell an asset and
then lease it back from the buyer. This arrangement can be a valuable source of short-term
finance .When a business requires immediate cash flow but wants to retain the use of
important assets.sale and leaseback is a strategic financial tool that enables companies to
unlock capital from their assets while maintaining operational continuity, making it a
practical option in short-term finance.
Increasing working capital management efficiency :Improving the managemnt of
cash ,inventory ,recievables and payables to reduce the need for external financing .For
example ,negotiating better payments terms with suppliers or reducing inventory levels can
free up cash
Leasing: Leasing involves a contractual agreement where a leasee (the asset borrower )
pays the lessor (the asset owner)for the use of an asset over a specified period.Leasing is a
means of financing the use of capital equipement ,the underlying principle being that use
is more important than ownership.It is a medium term financial arrangemnt usually from
one to ten years.

8. Equity financing refers to raising capital by selling ownership stakes in a company, usually in the
form of shares. This is a common way for businesses, particularly startups or those looking for
expansion, to secure long-term funding. The key advantage of equity financing is that the company
does not have to repay the funds or pay interest, unlike debt financing. However, equity holders
become part-owners of the company, which means they share in profits and have a say in business
decisions.
Issuing Common Shares:
Common shares (or ordinary shares) represent the basic ownership of a company. When a
company issues common shares, it sells pieces of ownership to investors, granting them rights in
return for their investment.
Issuing Preferred Shares:
Preferred shares are a hybrid form of equity that combines features of both debt and common
equity. When a company issues preferred shares, it offers ownership in the company with certain
preferences over common shares, especially when it comes to dividends and liquidation rights.
Equity Financing:

9. RAISING EQUITY
Raising equity involves issuing shares of the company to investors in exchange for
capital. Companies use This key method to fund their operations, expansion, and projects.
Unlike debt, equity doesn’t require repayment, but it does dilute the ownership and control
of existing shareholders.
There are several ways companies can raise equity, including issuing new shares (both
common and preferred), retaining earnings, and offering rights issues.

10. Methods of Raising Equity:
Issuing New Shares (Equity Capital):
When a company decides to raise capital, one common method is
to issue new shares to the public or private investors.

11. Methods of Raising Equity:
Retained Earnings:
Retained earnings refer to the portion of net income that is not
distributed to shareholders as dividends but is kept within the
company to reinvest in operations, fund growth, or pay down
debt.

12. RIGHTS ISSUES
A rights issue is when a company offers its existing
shareholders the chance to buy additional shares for
a reduced price.
A rights issue is an offer to existing shareholders to purchase
additional shares in the company at a discounted price, usually
below the current market price.

13. 1. Raise capital for expansion, debt repayment, or working capital
2. Strengthen balance sheet
3. Improve liquidity
4. Reward exsisting shareholders
Objectives:

14. Hybrid Financing:
These are instruments that combine features of both debt and equity, providing flexibility to the
company.
• Convertible Loan Notes: These are debt instruments that can be converted into equity
(shares) at a later date, offering the lender an option to benefit from future company growth.
• Loan Notes with Warrants: Similar to convertible loan notes, but the lender is given a
warrant (an option) to purchase shares at a predetermined price at a later time.

15. LONG-TERM LEASE:
A long-term lease, often referred to as a finance lease, is a
lease agreement where a company leases an asset (like
equipment, buildings, or machinery) for a significant part of
the asset’s useful life. The lease typically spans several years,
and in many cases, the company that leases the asset (the
lessee) is responsible for maintaining the asset and benefits
from its usage for most of its economic life.
Key Features:
• Capitalized in Financial Statements: Under accounting
standards (e.g., IFRS 16), long-term leases are often
capitalized. This means that the asset is treated as if the
lessee owns it, and both the asset and the lease liability are
recorded on the lessee’s balance sheet.

16. LONG-TERM LEASE
Risk/Reward Transferred: In a long-term (finance) lease, risks and rewards
associated with ownership are transferred from the lessor (owner) to the lessee (user).
This means the lessee takes on risks like maintenance, obsolescence, and changes in
asset value, while benefiting from using the asset to generate revenue. The legal title
stays with the lessor, but the lessee experiences ownership-like benefits.
Two Distinct Periods:
1. Primary Period: The initial lease term where the lessee makes payments and uses the
asset, bearing most of the risks and rewards.

2. Secondary Period: An option for the lessee to either extend the lease at a reduced
rate or purchase the asset at a nominal price after the primary period ends.

17. VENTURE CAPITAL
Venture capital (VC) is a type of financing that provides funds to new or growing companies that are
considered high-risk but have high growth potential. Venture capitalists (VCs) invest in businesses intending
to earn substantial returns, often by acquiring an equity stak in the company.
Key Elements:
1. High Risk Proposals: Venture capital typically funds high-risk proposals—business ideas or ventures
that traditional lenders or investors might avoid. These can be startups with untested markets, innovative
technology, or businesses at an early stage without a track record of profitability.
2. High Risk Prospects: The companies or projects VCs invest in often have high-risk prospects, meaning
the future performance of the business is uncertain. These companies are usually in volatile markets or
industries that are still developing.
3. Take Equity Share: Venture capitalists provide financing in exchange for an equity share in the company.
This means they take an ownership stake, becoming partial owners of the business.

18. DEBT FINANCING
Debt financing refers to the process of raising capital by borrowing money from
external sources, which must be repaid over time, usually with interest. This can
take various forms, including loans, bonds, and credit facilities. It is a crucial
aspect of financial management, as it allows companies to access funds
without diluting ownership. Debt financing includes:
Corporate Bonds: Long-term debt securities issued by companies to raise
funds from investors.
Debentures: Similar to bonds, they are unsecured loans based on the
company’s reputation rather than collateral.
Secured and Unsecured Debt: Secured debt is backed by assets (collateral),
while unsecured debt relies on the creditworthiness of the borrower.
Redeemable and Irredeemable Debt: Redeemable debt must be repaid by a
specific date, while irredeemable debt does not have a fixed repayment date.

19. CONCLUSION
Key Takeaway Points: Sources of Finance
1. Diverse Financing Options: Companies can choose from various sources of
finance, including equity, debt, and alternative financing methods, each offering
unique advantages and challenges.
2. Balance and Strategy: A successful financing strategy often involves a mix of
equity and debt, tailored to the company’s growth plans, risk profile, and market
conditions.
3.Informed Decision-Making: Understanding the implications of different
financing sources is crucial for effective financial management and long-term
sustainability.
These points highlight the importance of strategic planning in selecting the right
financing mix to support business growth and stability.

20. THANK YOU~