2.

SOURCES OF FINANCE
The topics covered are:

- Sources of long-term finance

- Sources of short-term finance
 Need for finance:

Firm need fund mainly for two purposes

- to fund long term decisions(including expansion,

diversification,modernisationand other similar
capital expenditures)

- to meet working capital requirements.(day to

day operations)
 Sources of long-term finance
 Equity capital
 Preference shares
 Retained Earnings
 Debentures capital
 Term loans
 Institutional finance
Sources of long-term finance
EQUITY
EQUITY CAPITAL
CAPITAL
-OWNERS’
-OWNERS’ equity
equity
-The
-The shareholders
shareholders are
are real
real owner
owner ofof the
the company
company
-Life
-Life time
time capital
capital
Advantages
Advantages ::

 Does
Does not
not cause
cause economic
economic burden
burden toto the
the company
company

 Permanent
Permanent source
source ofof capital
capital

 NoNo charge
charge on
on assets
assets

 Equity
Equity shareholders
shareholders get
get voting
voting rights
rights

 ItIt enhances
enhances credit
credit worthiness
worthiness of of the
the company.
company.
Sources of long-term finance : Equity
capital
 Sources of long-term finance
Preference capital
Some attributes similar to equity and
some to debentures
They have prior claim on return and
assets than equity shareholders
 Preference capital
Advantages :
 No charge on assets
 No loss of control
 Regular fixed income to investors
 Less costly than equity
 It is a part of net worth that increases the
strength of the capital structure
 Sources of long-term finance :
preference capital
Disadvantages:
 Expensive than debt finance
 Dividend not allowed for tad deduction
 If redeemed in recession, it leads to loss to the
company
 The unpaid dividend on cummulative
preference shares lesds to additional burden
for the company.
 Sources of long-term finance

Debentures
A debenture is an instrument of
acknowledgement of debt under the
common seal of the company. Debentures
are called creditor ship securities.
Debentures are usually secured by a charge
on the immovable properties of the
company.
 Debentures
Advantages :
 Company is able to raise a part of long term capital
without loosing control of ownership and management
of firm.
 Interest on debentures is lower than rate of pref. and
equity dividend. Less costly
 Interest paid on debentures is deductible income in
computing taxable income. It is charged on income of
the company
 Holders have a claim on the assets.
 For investors it is less risky.
 Sources of long-term finance
Debentures
Disadvantages:
 It becomes a permanent burden to the
company. Interest is inevitable payment
 Risk of winding up
 Difficulty in additional loans.
 No voting rights
 No extra profit
 Sources of long-term finance
 Retained Earning
 Term loans
 Institutional finance
 ADR and GDR
 Sources of short-term finance
 Public deposits
 Bank credits
 Commercial paper
 Advances from the customers