Managing Finance

 
Sources of Finance

SUBMITTED FOR SCDL,Pune, PGDBA-Finance

BY:
KAMAL DEEP SHARMA
Reg No 200759695

Kamal Deep Sharma Reg No 200759695

 Introduction

• In this Study we will be looking at different

sources of finance available for different type
of business. Also will be looking at the
definitions of different type of sources of
finance, the advantages, disadvantages and
also giving reasons to why different sources of
finance was chosen for the given case studies

Kamal Deep Sharma Reg No 200759695

 Types of sources of finance

• Bank Loan – is a long term loan and will often be for large amount
of money for starting up a business or to expanding. Business will
agree with the bank to pay installment monthly fees with interest
charge.
• Long term Loan – is a loan which is often being for a large sum of
money and usually the payment period is more than 15 years.
Usually is used for starting up new business, for expansion, buying
new fixed assets for the business. Loans are usually paid on a
monthly installments plus agreed fixed interest charge.
• Short term loan – is loan that is for a small amount within the
period of 5 years, plus agreed interest charge.
• Interest – Banks provide services by lending money in the form of
overdrafts and loans and bank will charge for this service. The extra
charge is called interest, these are the profit made.

Kamal Deep Sharma Reg No 200759695

 CASE STUDY
• A medium-sized engineering firm with an
annual return of over Rs 2.5 million has
decided to install a new piece of machinery
to help improve its productivity. The
equipment needs to be housed in a new
building to be construed on the site. The
forecast of the building is Rs 150,000 and the
equipment Rs 400,000

Kamal Deep Sharma Reg No 200759695

 Solution
• The appropriate source of finance for this case
would be to take 50% from the retained
earnings and 50% from the bank loan. This
approach will reduce the number of years to
pay back in installment and will result in less
amount of interest to pay from the amount
borrowed.

Kamal Deep Sharma Reg No 200759695

 Case II
• An individual has been made redundant after
20 years with a major organization and has
received a lump sum redundancy payment of
Rs 70,000. The individual is planning to setup
bookmakers and has identified suitable
premises valued at Rs 180,000 near to a
major town centre shopping precincts

Kamal Deep Sharma Reg No 200759695

 Solution
• Joint venture will be ideal for this case, as the individual has
a capital sum of £70,000 and another partner will put in a
capital and will be able to borrow a smaller amount of
money from the bank. The advantage for joint venture is
that the risk is spread, advice will be bought in through
experience and the company will be able to bring expertise
for higher growth and for long term basis. And the
disadvantage for is that profits will be shared with a
shareholder.
• On the other hand the disadvantage of the bank loan will
be that the bank may not be able to provide a loan due to
the redundancy; unless the owner provides good business
strategy plan which will forecast to give a good return and
also owns an assets or security i.e. Property, land etc.

Kamal Deep Sharma Reg No 200759695

 CASE 3
• A large plc is planning on moving a major
part of its production facility to Cornwall. It
has identified a site near a former chalk pit
that is now not used. The estimated cost of
the facility is Rs 4.5 million.

Kamal Deep Sharma Reg No 200759695

 SOLUTION
• A long term bank loan will be suitable to for a
large company planning to move as the estimated
cost is Rs 4.5 million and share issue will also be
ideal as this can raise capital that can be used for
the move, this is a long term source of finance.
Shareholders will have to share the control of
business, each share gives the shareholder a vote
on the direction of the company and will spread
the risk to the number of shareholders, and this
will also reduce the amount of loan to borrow
from the bank which will also result to fewer
installments and less interest to pay.
Kamal Deep Sharma Reg No 200759695
 CASE 4
• A Football club is anticipating turning fully
professional after the team secured
promotion to the Mohun Bagan
premiership. To take this place in league, the
league committees have insisted that it also
improves facilities at the ground. It has been
estimated that the cost of these two
measures will be Rs 500,000.

Kamal Deep Sharma Reg No 200759695

 Solution
• The best way to inject a source of finance in aFooltball club is through finding a
sponsor. A sponsor will bring money into the club and raise fund to enable the
club to improve its facilities.
• Advantages of having a sponsor:
• The marketer can reach different target of audiences
• The sponsors’ logo could appear on the shirts of the players, logo on the playing
field etc.
• This gives different advertising that will encourage and promote increase in
participation
• Sponsors can get many benefits
• Different advertising will encourage and promote increase in participation
• Disadvantages are:
• If sponsors withdraw, the club may not be able to carry on
• Sports loss identity dictated by sponsors
• Less successful performers may not receive any sponsorship
• Bad product may damage reputation on sport

Kamal Deep Sharma Reg No 200759695

 CONCLUSION
• During the research of this assignment; I have
concluded that there are many type of finance
can be used at one particular time.
Depending on the type of company and trying
to get the best possible finance deal to save
the borrower on the risk of borrowing high
amount and also to pay high amount on the
interest rate.

Kamal Deep Sharma Reg No 200759695