SOURCES OF FINANCE

SOURCES
OF
FINANCE

EQUITY DEBT

INTERNAL TERM MISCELLANEOU

EQUITY PREFERENCE BONDS
ACCRUALS LOANS S SOURCES

1.1 EQUITY:
Equity capital represents ownership capital as equity shareholder collectively own the
company. They enjoy the rewards and bear the risks of ownership.
Rights of equity shareholders
 Right to income
 Right to control
 Right to liquidation
 Pre-emptive right

1.2 PREFERENCE CAPITAL:

Preference capital represents a hybrid form of financing- it partakes some characteristics of
equity and some of debentures.
 The preference dividends are payable only out of distributable profit. (non-
obligatory)
 The dividend rate is usually fixed
 The claim of preference shareholders is prior to equity shareholders
 Preference shareholders do not enjoy right to vote

1.3 INTERNAL ACCRUALS:

The internal accrual of a firm consists of depreciation charges and retained earnings.
Depreciation represents the allocation of capital expenditure to various period over which the
capital expenditure is expected to benefit the firm.

2.1 DEBENTURES (OR BONDS):

Debentures are instruments for raising debt finance. Debentures holders are the creditors of
the company. It contains a contract for the repayment of debt and the interest thereon at a
specified rate.
  Deep discount bonds
 Convertible debentures
 Floating rate bonds
 Indexed bonds

2.2 TERM LOANS

Term loans, also referred as to term finance, represent a source of debt finance which is
generally repayable in less than 10 years. They are typically employed to finance acquisition
of fixed assets and working capital margins
Features of term loans
 Currency
 Securities
 Interest payment and principal payment
 Restrictive covenants

2.3 MISCELLANEOUS SOURCES

 Deferred credit
 Lease and hire purchase finance
 Unsecured loans and deposits
 Commercial paper
 Short term loans from financial institutions