DOMESTIC MEANS AND 

SOURCES OF FINANCE
‐ FCA CGMA JALAJ CHHAYA
 INTRODUCTION

Sources of finance for business are equity,  On the basis of a time period, sources are 
debt, debentures, retained earnings, term  classified as long‐term, medium term, and 
loans, working capital loans, letter of  short term. Ownership and control classify 
credit, venture funding etc. These sources  There are many characteristics on the  sources of finance into owned capital and 
of funds are used in different situations.  basis of which sources of finance are  borrowed capital. Internal sources and 
They are classified based on time period,  classified. external sources are the two sources of 
ownership and control, and their source of  generation of capital. All the sources of 
generation. It is ideal to evaluate each  capital have different characteristics to 
source of capital before opting for it. suit different types of requirements.
OVERVIEW
 CLASSIFICATION
LONG TERM SOURCES OF FINANCE / FUNDS MEDIUM TERM SOURCES OF FINANCE / FUNDS SHORT TERM SOURCES OF FINANCE / FUNDS

Share Capital or Equity Shares Preference Capital or Preference Shares Trade Credit

Preference Capital or Preference Shares Debenture / Bonds Factoring Services

Retained Earnings or Internal Accruals Lease Finance Bill Discounting etc.

Debenture / Bonds Hire Purchase Finance Advances received from customers

Term Loans from Financial Institutes, Government, and  Medium Term Loans from Financial Institutes, Government,  Short Term Loans like Working Capital Loans from 

Commercial Banks and Commercial Banks Commercial Banks

Venture Funding Fixed Deposits (<1 Year)

Asset Securitization Receivables and Payables
 Long Term Finance
• Long term financing means capital requirements for a period of more than
5 years to 10, 15, 20 years or maybe more depending on other factors.
Capital expenditures in fixed assets like plant and machinery, land and
building etc of a business are funded using long-term sources of finance.
Part of working capital which permanently stays with the business is also
financed with long-term sources of funds. Long-term financing sources can
be in form of any of them:
• Share Capital from Equity shares
• Preference shares
• Retained Earnings or Internal Accruals
• Debentures/Bonds
• Term Loans from Financial Institutes, Government, and Commercial Banks
• Venture Funding
• Asset Securitization
 Medium Term Finance
• Medium Term Sources of Finance
• Medium term financing means financing for a period of 3 to 5 years and
is used generally for two reasons. One, when long-term capital is not
available for the time being and second when deferred revenue
expenditures like advertisements are made which are to be written off
over a period of 3 to 5 years. Medium term financing sources can in the
form of one of them:
• Preference Capital or Preference Shares
• Debenture / Bonds
• Medium Term Loans from
• Financial Institutes
• Government, and
• Commercial Banks
• Lease Finance
• Hire Purchase Finance
 A corporate bond is a debt security issued by a corporation and
sold to investors. The backing for the bond is usually the
ability of the company to repay the borrowed amounts, which
is the money that is earned from profits and future operations.
Sometimes, the company's physical assets are pledged as
collateral. Corporate bonds are debt securities, issued by both
private and public corporations. Companies issue corporate
bonds to raise money for a variety of needs, such as building a
CORPORATE new plant, purchasing equipment, or growing the business.

BONDS
Bonds are to be rated by external agency for arriving at a risk
assessment and interest rate. AA plus categories are relatively
safe to invest
 • Short Term Sources of 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
Short Term • Short Term Loans like Working capital loans from Commercial
Finance Banks
• Fixed Deposits for a period of 1 year or less
• Advances received from customers
• Creditors
• Payables
• Factoring Services
• Bill Discounting
LEASE RENTAL DISCOUNTING

• Lease Rental Discounting (LRD) is a term loan offered against

rental receipts derived from lease contracts with corporate tenants.
The loan is provided to the lesser based on the discounted value of
the rentals and the underlying property value.
• LRD is the primary charge created against your lease rental income
and also the property is mortgaged with the bank
• Generally tends to me MCLR+ Spread basis risk
• Very famously used mode of finance in commercial and mall
industry
 Other factors considered by banks are

External credit rating from rating agency

DSRA creation
LRD
CONTINUED Debt equity ratio

Management skills

Long term leases, rentals and contracts

Pipeline deals and overall market scenario

REIT
• Real Estate investment Trusts or REITs are mutual fund like
institutions that enable investments into the real estate sector by
pooling small sums of money from multitude of individual
investors for directly investing in real estate properties so as to
return a portion of the income (after deducting expenditures) to unit
holders of REITs, who pooled in the money.

• REIT can invest in commercial real estate assets, either directly or

through Special Purpose Vehicle (SPVs) which invests more than
80% of its assets in properties. If REIT is investing through an SPV,
REIT has to hold controlling interest with not less than 50% of the
equity share capital or interest in SPV.
 • Value of the assets owned/proposed to be owned by REIT should
be atleast Rs 500 crore.
• The REIT can raise funds initially through an initial offer and
once listed, may subsequently raise funds through follow-on
offers.
• Minimum issue size for initial offer is Rs 250 crore with a
REIT minimum public float of 25%.
• Listing of units in a stock exchange is mandatory in India.
CONTINUED • The minimum subscription size for units of REIT is Rs 2 lakhs
and the trading lot is specified at Rs 1 lakhs so as to allow only
reasonably informed investors into this market.
• Permitted Investments by REIT are:
• Atleast 80% in completed and revenue generating properties.
 REIT CONDITIONS
• Not more than 20% in developmental properties and other eligible investments.
Provided, investment in developmental assets is not more than 10% of the value of
REIT assets.
• REIT to invest in at least 2 projects with not more than 60% of value of assets
invested in one project. Related party transactions are subject to strict scrutiny.
• REIT to distribute not less than 90% of the net distributable cash flows, subject to
applicable laws, to its investors.
• Maximum borrowing permitted is 49% of the value of the REIT assets. Further,
credit rating and post 25% unit holders approval are mandatory to raise debt.
• Full valuation to be carried out at least once a year and half yearly updating of the
same has to be carried out.
 The introduction of REITs in India is expected to significantly benefit the investors as well as 
the developers in the real estate industry. REIT are expected to provide an exit route to Indian 
developers who are struggling to reduce debt, while on the other hand it gives investors the 
ability to buy into the country’s property market which otherwise may be out of their reach 
due to the sheer size of the amount to be spent for acquiring such properties.

Thus, from the perspective of investors, holding units of REITs is a substitute for investing 
directly in real estate. This is similar to investing in Gold Exchange Traded Fund (Gold‐ETFs).

REIT BRIEF REITs would also enable diversification of the portfolio of the investors and provide the 

investors a new product that is regular income generating.

The freeing up of developer's capital is expected to bring in more investments in real estate, 
thereby stimulating growth. Funds locked up in various completed projects can be released to 
facilitate new infrastructure projects to take off.

Assets that may qualify to be included in REITs may reach $20 billion by 2020 (according to an 
estimate by property broker Cushman & Wakefield). In the first three to five years, as much as 
$12 billion could be raised.