ICCT COLLEGES FOUNDATION INC.

CAE13-FINANCIAL MANAGEMENT

Villariez Jr, Baltazar D. 20185539 Mrs. Ostan

ASSIGNMENT/ACTIVITY-CHAPTER 10

QUESTION:

1. Explain further the difference of every special source of finance such as the
strengths and weaknesses.

ANSWER:

LEASE FINANCING - Lease financing is a popular and frequent asset-based finance

strategy that offers an alternative to loan financing. A lease is a legal agreement. A
contract in which one party, the asset's leaser (owner), agrees to let another leaser use
the item in exchange for periodic rental payments. A lease is a contractual agreement
between the asset owner and the asset user for a certain length of time in exchange for
a periodic fee.

ADVANTAGES/STRENGTHS:

 Liquidity: The lessee can generate money from the asset without having to
invest any money in it. He can use his funds to meet his working capital
requirements.
 Convenience: Leasing is the most convenient way to finance fixed assets.
There is no need for a mortgage or hypothecation. Long-term borrowing from
financial institutions is avoided, as are the restrictions that come with it.
Leasing involves many less formalities than borrowing money from a bank or
other financial organization.
 Hidden Liability: Lease commitments are not recognized as a liability on the
balance sheet of the company. Loans used to purchase assets, on the other
hand, are listed as a liability. As a result, leasing aids the lessee in reporting a
lower debt-to-equity ratio.
 Time Saving: The asset is immediately used without the need to waste time
applying for a loan, waiting for approval and sanction, and so on. Lease
rentals can be matched to the lessee's cash flow.
 No Risk of Obsolescence: The lessor bears the risk of the asset becoming
obsolete owing to technical developments.
  Cost Saving: Lease rentals are deducted from taxable income, which saves
money. In bankruptcy, the lessee has a smaller responsibility than under debt
financing.
 Flexibility: Leasing is a more flexible option. The rental schedule can be
changed to meet the lessee's genuine needs and problems.

DISADVANTAGES/WEAKNESSES:

 Only the right to utilize the asset is granted to the lessee. If the leasing
company goes out of business, the asset may be taken back from the lessee,
causing him to lose money.
 The lessee is prohibited from altering or improving the asset without the
permission of the lessor. The lessee may also be subject to some restrictions
imposed by the lessor.
 The lessee is responsible for paying the lessor lease rentals on a regular
basis.

VENTURE CAPITAL - Venture capital finance is a new type of financial intermediary

that first appeared in India in the 1980s. It is a long-term financial help provided to
projects that aim to introduce new products, inventions, ideas, and technology. Venture
capital funding is better suited to high-risk businesses that require large investments
and yield results in 5 to 7 years.

ADVANTAGES/STRENGTHS:

 Expertise in business: Obtaining venture capital financing can provide a start-

up or fledgling business with a vital source of expertise and counsel in addition
to cash backing. This can aid in a range of corporate decisions, such as
financial and human resource management. As your company grows, making
smarter judgments in five key areas will become increasingly critical.
 Additional resources are available: A VC firm can provide active support in a
number of essential areas, including legal, tax, and personnel problems, which
is very important at this stage in a fledgling company's growth. Two potential
important benefits are faster expansion and higher success.
 Connections: Venture capitalists usually have a lot of connections in the
corporate world. Taking use of these connections could be extremely
beneficial.

DISADVANTAGES/WEAKNESSES:

 Control is being lost: The disadvantages of equity financing in general can be

exacerbated by venture capital funding. You may think of it as a high-powered
version of equity financing. Your VC partners are likely to want to be involved
 if you have a substantial capital influx and professional – and maybe
aggressive – investors. The quantity of their investment could affect how much
influence they have over the company's development.
 Ownership by a minority: You may lose managerial control depending on the
level of the VC firm's interest in your company, which may be greater than
50%. In essence, you could be relinquishing control of your company.

FACTORING - Factoring is a financial process that involves converting credit bills into
cash. Accounts receivables, recoverable bills, and other credit dues resulting from credit
sales are recorded as book credits in the books of accounts. Credit risk, debtor credit
worthiness risk, and a variety of other incidental and consequential risks are all
involved. The factor assumes these risks by purchasing these credit receivables without
recourse and collecting them when they are due. The cash received from the factoring
agent replaces these balance-sheet items. Factoring is sometimes known as "Invoice
Agent" or "Receivables Purchase and Discount." Although they can be with or without
remedies, the risk is usually assumed by the factoring agent. The loss of interest, credit
risk, and the chance of losing both principal and interest on the amount involved are all
factored into the discount rate.

ADVANTAGES/STRENGTHS:

 Immediate Cash Inflow: This sort of financing reduces the time it takes to
collect money. By selling receivables to a factor, it allows for quick cash flow.
The availability of liquid cash might sometimes determine whether or not you
seize an opportunity. Factoring provides a cash boost that can be used for
capital expenditures, securing a new order, or meeting an unforeseen
scenario.
 Business Operations and Growth: By selling invoices, business managers can
relieve themselves of the burden of collecting money from clients. The
receivables department's resources can be redirected to corporate operations,
financial planning, and future growth.
 Bad Debt Avoidance: There are two forms of factoring: with recourse and
without recourse. In without recourse factoring, the loss is absorbed by the
factor in the event of bad debts. As a result, once the seller sells off its
receivables, it owes no obligation to the factor.
 Finance Can Be Arranged Quickly: Factors can give funds faster than banks.
In comparison to other financial institutions, factoring businesses provide
faster application, less documentation, and faster fund realization.
 No collateral is required: advances are made based on the strength of
accounts receivables and their creditworthiness. Factors do not require any
collateral security to be pledged/hypothecated, unlike cash credit and
overdraft. New enterprises and startups can readily obtain advances if their
receivables are good.
  Not a loan, but a sale: A factoring transaction is a sale, not a loan. Factoring,
unlike other methods of financing, does not result in an increase in a
company's liabilities. As a result, there are no negative effects on the financial
ratios. It simply entails the transfer of book debts into cash.
 Customer Analysis: Factors give the seller with valuable information and
insight into the credit strength of the party from whom receivables are owed. It
aids the parties in negotiating better terms in future contracts.

DISADVANTAGES/WEAKNESSES:

 Profit Reduction: As a charge for the services provided, the factor deducts a
specified discount from the amount of accounts receivable. Furthermore, the
factor may charge interest on the advance made in some instances. As a
result, an entity's profit is cut by a large amount.
 Customer Credit Reliability: This element checks and evaluates the credit
health of the party who owes bills receivables. This is a crucial issue that the
vendor has no control over. Due to the concerned party's poor credit rating, a
factor may refuse to extend advances.
 Exhaustion of Collateral Security: Factoring exhausts an entity's bills
receivables because the entity is no longer eligible to payment. The book
debts are no longer under the seller's control. As a result, they cannot be used
as collateral to get any other sort of financing.
 Contingent Liability: In the situation of with recourse factoring, the seller's
liability is not totally relinquished. If a party fails to pay the factor, the factor
has the legal right to reclaim the debt from the seller. As a result, in the event
of default, the seller is contingently accountable to the factor for payment of
the debts in the future. This condition would have an influence on current
corporate operations and financial planning.
 Higher Finance Charges: Factors often deduct 2% to 4% of the entire amount
involved as fees over the course of 45-60 days. The cost of finance is
estimated to be between 18 and 24 percent per year when calculated
annually. This is far higher than other sources of funding.
 Loss of Personal Touch: Due to their professional nature and severe
processes, the buyer may be unwilling to cope with a factor. Factoring
companies may also send periodic letters to the buyer as a reminder of the
debt. Factoring may give the buyer an unfavorable impression of the vendor.
He may contemplate moving vendors as a result of the loss of personal touch.

MERCHANT BANKING - Merchant banking is a type of fee-based financial service that

includes underwriting, consulting, and other business-related services. Merchant
banking is a professional service that merchant banks provide to their customers in
consideration of their financial needs in exchange for a charge. Merchant banks are
financial institutions that provide major firms with fundraising, financial advice, and loan
services.

ADVANTAGES/STRENGTHS:

 Corporate counseling will be provided: Corporate units will typically receive

corporate counseling as part of their service package from merchant banks.
This is done to assess a company's entire financial performance in order to
create a big splash in a global market. These evaluations can assist a
company in receiving honest and critical feedback that is crucial to their
performance, allowing them to improve their reputation among investors and
stakeholders.
 You get portfolio management: Merchant banks provide services to investors
and firms that issue securities. A merchant bank's typical client is an
institutional investor trying to develop a safe portfolio that will help them grow
their wealth over time.
 You'll get help with issue management: Some merchant banks may act as a
sponsor for bond offerings and other types of financing that a company might
need. They engage with other brokers and bankers to expose the difficulties,
determine whether going public is the best line of action, and select
underwriters and agreements that establish a mutually advantageous
relationship for all parties.
 A merchant bank can provide rapid debt funding: While a merchant bank's
primary focus is on long-term wealth growth, businesses can also apply for
and receive traditional lending products. To raise the funds needed for a given
project, you can take out short-term and long-term bank loans. To assess
ultimate eligibility, most funding applications will require a business plan that
considers total costs, potential returns, and the company's overall credit rating.
 You get lease financing services from merchant banks, which give finance to
businesses and lease to their clients: This allows you to have access to and
control over specific assets that you may need without having to take
complete ownership of them.
 You can secure your IP: When you operate with a merchant bank, you're
working with a partner who makes a profit by assisting you in making a profit.
That implies they're invested in ensuring the security of your intellectual
property, patents, and other tangible assets. During the merchant banking
procedure, whatever information you provide is kept private.
 Merchant banks supply funds by issuing a letter of credit, which can be used
to manage currency transactions for your firm: If you want to expand
worldwide, the vendors will accept the letter of credit as payment for the
purchase you're making. Then you'll go over the legal requirements for doing
business in the new market. As monies are transferred out of international
markets, a merchant bank will assist you in managing currency exchanges.
DISADVANTAGES/WEAKNESSES:

 Your account will cost more than a standard bank account: Merchant banks
typically charge more fees for their services and products than ordinary banks.
 You must examine your company's size: Thanks to the Internet, every startup
or small business can reach an international market. Just because you have a
presence on the worldwide stage doesn't ensure you'll be eligible for merchant
banking services. There are normally size requirements, such as minimum
revenue requirements, corporate structure, and so on.
 You'll always run the danger of a mixed success rate: merchant banks may
agree to engage with you on a financing package, but that's only the first step
on the road to success.
 You might not get full funding: One method merchant banks help to distribute
risk is by providing partial funding for leases, expansions, and other
investment needs. As a result, your business will have to work with many
merchant banks rather than just one. They gain from each new contribution
because their aggregate risk is reduced.
 You might not have access to every possible product: traditional banks might
be prepared to give you money even if a merchant bank isn't. This is because
traditional banks typically offer a wide range of products, lowering their total
risk profile internally, a strategy that not every merchant bank follows.
 As part of the funding process, you'll be investigated: A merchant bank may
advertise a free review, but what they're really doing is doing a thorough
examination of your entire organization. They'll examine your financial
situation, assess the safety of your assets, and even assess your personal
security.
 You can't count on a renewal or extension: When funds are made available
through merchant banking, they're usually only available for a limited time.
Receiving an agreement extension or renewal may be difficult, if not
impossible. Long-term funding is sometimes accessible through merchant
banking, however the majority of projects approved are for a period of five
years or less.
 You may have additional reporting responsibilities to meet: a merchant bank
can assist you in staying on top of your regulatory obligations. They will not,
however, prepare the reports for you. When you start working with a merchant
bank, you may need to provide additional information to any stakeholders that
are involved with your company. Additional expenditures are nearly always
related with increased reporting and compliance obligations.

CREDIT RATING - Credit rating is the process of putting a value on credit instruments
by evaluating or analyzing their solvency and expressing it with symbols. "Credit rating
is solely for the purpose of awarding bonds based on the investment quality of the
bonds." A current assessment of the credit quality of the obligator with respect to a
specific obligation is known as a corporate or municipal debt rating. A credit rating is a
numerical estimate of a borrower's creditworthiness in general or in relation to a specific
debt or financial obligation. An individual, a corporation, a state or provincial authority,
or a sovereign government can all be given a credit rating if they want to borrow money.

ADVANTAGES/STRENGTHS:

 Helps in Investment Decision: Credit rating provides insight into the

creditworthiness of the issuing organization as well as the risk connected with
a specific security. Investors might determine whether or not to invest in a firm
based on its credit rating.
 Investment Judgments Freedom: It is extremely difficult for ordinary individuals
to make investment decisions. They seek guidance from stock brokers,
merchant bankers, and portfolio managers before making investment
decisions. By assigning rating symbols to a specific investment, credit rating
services make the work simple.
 Assurance of safety: A high grade gives the investor confidence in the
instrument's safety. Companies with good instrument ratings maintain a
healthy financial discipline.
 Choice of Instruments: Credit rating agencies help investors to select a
specific instrument from a wide range of options by rating securities.
 Authenticity and Reliability of Ratings: The ratings awarded to the instruments
are genuine and trustworthy. The rating companies are unaffiliated with the
issuing corporation and have no business dealings with them. As a result, they
give the instruments a decent rating. Investors will be more confident as a
result of this.
 Continuous Monitoring: Credit rating companies not only assign rating
symbols, but also monitor them on a regular basis. Depending on the
company's performance and position, the rating agency downgrades or raises
the rating symbols.

DISADVANTAGES/WEAKNESSES:

 Non-disclosure of Material or Significant Information: The company being

rated may not provide the credit rating agency with all material or important
information. Any action made in the absence of such critical information may
result in a loss for investors.
 Possibility of Bias: A credit rating agency's rating is based on information
gathered from the company. The information gathered by the rating agency
may be skewed by the rating team's personal bias.
 Problems for New Company: Rating agencies assign ratings based on
information provided by the company. This presents a problem for the new
company. A new company, on the other hand, may not be able to give enough
 evidence to demonstrate its financial stability. As a result, it may receive a
lower credit rating. A poor credit rating might make it difficult to obtain loans
from the market.
 Static in Nature: Ratings are static in nature since they are based on a static
analysis of the company's current and historical data at a specific point in time.
A variety of political, economic, social, and environmental factors have a direct
impact on the company's operations. Any changes made after the rating may
defeat the rating's objective.
 Ratings are not a certificate of soundness: Rating agencies' ratings are just
their view on a company's capacity to satisfy its interest obligations. Rating
symbols do not indicate financial stability, product quality, management, or
personnel, among other things. To put it another way, a rating does not imply
that a corporation is completely sound.
 Difference in Rating Grades: Various rating organizations may assign different
grades to the same instrument due to a variety of criteria. This may cause
investors to get perplexed.

MUTUAL FUNDS - Mutual funds are a type of fund-based financial service that allows
small investors to participate in the stock market. It is a concept that aims to entice
small investors to pool their savings and invest them in a safe and beneficial manner.
Mutual funds have grown quite popular in industrialized countries, and they are rapidly
expanding in emerging countries such as India. Mutual funds serve as a conduit for
investors to access the stock market.

ADVANTAGES/STRENGTHS:

 Advanced Portfolio Management: When you acquire a mutual fund, you pay a
management fee as part of your cost ratio, which is used to engage a
professional portfolio manager who buys and sells stocks, bonds, and other
securities. This is a tiny fee to pay for professional investment portfolio
management assistance.
 Dividend Reinvestment: As the fund's dividends and other interest income
sources are announced, they can be used to buy more mutual fund shares,
allowing your investment to grow.
 Risk Reduction (Safety): Diversification helps to reduce portfolio risk, as most
mutual funds invest in anywhere from 50 to 200 different securities, depending
on the focus. Several mutual funds that invest in stock indexes have 1,000 or
more individual stock investments.
 Convenience and Reasonable Pricing: Mutual funds are simple to purchase
and understand. They usually have modest investment minimums and are
only traded once a day at the closing net asset value (NAV). This removes
day-to-day price fluctuations as well as numerous arbitrage opportunities used
by day traders.
DISADVANTAGES/WEAKNESSES:

 High Expense Ratios and Sales Charges: If you don't keep track of mutual
fund expense ratios and sales charges, they can quickly spiral out of control.
Investing in funds with expense ratios greater than 1.50 percent should be
done with caution, as they are considered to be on the higher end of the cost
spectrum. 12b-1 advertising fees and sales commissions in general should be
avoided.
 Abuse of Authority by Management: If your management is abusing their
authority, churning, turnover, and window dressing may occur. Unnecessary
trading, excessive replacement, and selling losers prior to quarter-end to
balance the books are examples of this.
 Tax inefficiency: Whether they like it or not, mutual fund investors do not have
a choice when it comes to capital gains distributions. Investors often get
distributions from the fund that are an unavoidable tax event due to turnover,
redemptions, gains, and losses in security holdings during the year.
 Poor Trade Execution: If you purchase or sell a mutual fund before the cut-off
time for same-day NAV, you will receive the same closing price NAV for your
buy or sell. Mutual funds offer a poor execution approach for investors hoping
for faster execution timeframes, which could be due to short investment
horizons, day trading, or market timing.