Sources of finance

Assignment#3
Corporate finance

FINANCE
“It addresses the way in which individuals, business entities and other organizations allocate
and use monetary resources over time.”

The term finance may thus incorporate any of the following:

The study of money and other assets

The management of those assets
To provide funds for the business

Objective of Finance:

To put the corporate money into the best place which can then generate long term- profit of
the corporation.

EXTERNAL FINANCING
INTERNAL FINANCING
LOAN FINANCING

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Sources of finance
Assignment#3
Corporate finance

Sources of finance:

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Sources of finance
Assignment#3
Corporate finance

Internal Sources of Finance:

“These are sources of finance that comes from the business assets and activities.”

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Sources of finance
Assignment#3
Corporate finance

Personal savings
This is the amount of personal money an owner, partner or a shareholder has at his
disposal to do whatever he wants. When the business seeks to borrow the personal money
of a shareholder, partner or the owner for the business financial needs, source of finance
is known as personal savings.

Retained profits
These are the undistributed profits of the company. Not all the profits earned by the
company are distributed as dividends to its shareholders. Remainder of the profits after
all the payments made for the trading year known as retained profits. This remainder is
saved by the business as a back up in times of financial needs and may be later used for
company development and expansion.

Sale of assets
The business can finance new activities or pay-off debts by selling its assets such as
property, fixtures & fittings, machinery, vehicles etc. It is often used as a short term
source of finance (e.g. selling a vehicle to pay debts) but could provide more longer term
finance if the assets being sold are valuable (e.g. land or buildings).

Working capital

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Sources of finance
Assignment#3
Corporate finance

It refers to the sum of money that business uses for its daily activities. Working capital is
the difference between current assets and current liabilities. Proper working capital
management is vital as its one of the important source of finance.

External Sources of Finance:

Loans
Bank lending is still mainly short term, although medium-term lending is quite common these
days. It can be from

financial institutions
state financial corporation
commercial banks

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Sources of finance
Assignment#3
Corporate finance

Short term lending

Medium term lending.
Long term lending

Leasing
A lease is an agreement between two parties, the "lessor" and the "lessee". The lessor owns a
capital asset, but allows the lessee to use it. Basic forms of lease: “Operating leases" and
“Finance leases".

Share Issue
A company can raise substantial funds through an IPO (initial public offering). These funds
are usually used for large expenses, such as new product development, expansion into a new
market and setting up a new plant.

Ordinary shares
Preference Shares

Companies that are already listed on a stock exchange can opt for a rights issue, which seeks
additional investment from existing shareholders. They could also opt for deferred ordinary
shares, wherein the issuing company is not required to pay dividends until a specified date or
before the profits reach a certain level

Debentures
This is a form of long term loan that can be taken out by a public limited company for a large
sum and it will be paid back over several years. It is usually borrowed from specialist
financial institutions.

Factoring Services

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Assignment#3
Corporate finance

This involves a company outsourcing its invoicing arrangements to an external organisation.

It immediately allows the company to receive money based on the value of its outstanding
invoices as well as to receive payment of future invoices more quickly. It works by the firm
making a sale, sending the invoice to the customer, copying the invoice to the factoring
company and the factoring company paying an agreed percentage of that invoice, usually
80% within 24 hours.

Receivables

Overdraft

A bank overdraft may be a good source of short-term finance to help a business flatten
seasonal dips in cash-flow, which would not justify or need a long-term solution. The
advantage here is that interest is calculated daily and an overdraft is therefore cheaper than a
loan.

Hire purchase

Hire purchase arrangements enable a firm to acquire an asset quickly without paying the full-
price for it. The company will have exclusive use of the item for a set period of time and then
have the option to either return it or buy it at a reduced price. This is often used to fund
purchases of vehicles, machinery and printers.

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Sources of finance
Assignment#3
Corporate finance

Venture Capital

Venture capital (also known as VC or Venture) is a type of private equity capital typically
provided for early-stage, high-potential growing companies. Venture capital typically comes
from institutional investors and high net worth individuals and is pooled together by
dedicated investment firms. As a consequence, most venture capital investments are done in a
pool format where several investors combine their investments into one large fund that
invests in many different startup companies.

International Sources of Finance:

It can be done through:

Foreign direct investment
IMF
World Bank

CRUX:

Money is a scarce resource and each source has its own advantages and
disadvantages. Lenders will be looking for a return on investment, the size of

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Assignment#3
Corporate finance

the risk and the flexibility with which they can get their money back when they
want or need it. For the company seeking money, the decision as to the best
source will ultimately depend on what the money is for, how long the money is
needed for, the cost of borrowing and whether the firm can afford the
repayments.