2. Financial Needs & Sources of Finance of a Business
1. Long-term financial needs: For starting business, business needs fund for buying
fixed assets like machinery, land, plant and building. This requirement may be of 10
to 15 years.
The important sources of long-term finance are :-
 Issue of shares
 Issue of debentures
 Loans from financial institutions
 Reinvestment of profits
2. Medium-term financial needs: Such requirements refer to funds for a period
exceeding one year but not exceeding 5 years. . It involves financing certain activities
like renovation of buildings, modernization of machinery, heavy expenditure on
advertising, etc.
The important sources of mid-term finance are :-
 Preference shares
 Debentures/Bonds
 Public deposits/fixed deposits for a duration of three years
 Financial institutions

3. 3. Short term financial needs: Short term financial needs are for fulfilling the
working capital requirements. In this, we manage to get short term loan
which will be repayable within one year.
The important sources of short-term finance are :-
 Banks
 Trade credit
 Installment credit
 Advances received from customers

4. Long Term Sources of Finance
a)Owner’s Capital or Equity: A public limited company may raise funds from
promoters or from the investing public by way of owners' capital or equity
capital by issuing ordinary equity shares. Ordinary shareholders are owners of
the company and they undertake the risks inherent in business. In other word,
Owner’s equity, often just called equity, represents the value of the assets that
the owner can lay claim to.
b)Preference Share Capital: The money or capital that a company raise from
selling preference shares. Shareholders with these shares must be paid before
those with ordinary shares when a company is paying dividends or if it goes
bankrupt. The rate of dividend on preference shares is normally higher than
the rate of interest on debentures, loans, etc.
c)Debentures or Bonds: Debenture is a document of loan taken by the
company. A debenture is a written acknowledging a debt containing provisions
as regarding the repayment of principal and payment of interest at fixed rate.
Debenture includes debenture stock, bonds and other securities of a company.

5. d) Types of Debentures
1. Bearer Debenture: The names of the holders of such debenture are not
registered in the company’s book. Such debentures are transferable
merely by physical delivery of the document.
2. Registered Debenture: The names and addresses of such debenture
holders are registered in the company’s book. Such a debenture is not
transferable by mere delivery. The transfer of debentures in this case
requires the execution of proper transfer deed.
3. Naked Debenture: The debenture which does not have security is
known as naked debenture. It is also called as unsecured or simple
debentures.
4. Secured Debenture: The debenture which is secured either on a
particular assets or on the whole assets of the company is known as
secured debenture.
5. Redeemable Debenture: The debenture which is issued for a particular
fixed period is known as redeemable debenture. On the expiry of the
fixed period, the principal amount of debenture is paid off to the
debenture holder.

6. 6. Irredeemable Debenture: It is also known as perpetual debenture,
which is not redeemable during the life time of the company. It is
redeemable only at the time of liquidation of company.
7. Convertible Debenture: The debenture which is convertible into
shares of the company, after some time at the option of debenture
holder is termed as convertible debenture.
8. Non-Convertible Debenture: The debenture which is not convertible
into shares of the company is termed as non-convertible debenture.

7. e)New Financial Instrument:
 Participating preference shares
 Non-voting shares
 Detachable equity warrants
 Participating debentures
 Convertible debentures redeemable at premium
 Zero coupon convertible note
 Mortgage backed securities
f) Loans From Financial Institution: The specialized institutions provide long-
term financial assistance to industry i.e. term loan. Term loan is a loan made
by bank/financial institution to a business having an initial maturity of more
than one year. Term loans represent secured borrowings and at present it is the
most important source of finance for new projects. They generally carry a rate of
interest inclusive of interest tax, depending on the credit rating of the borrower,
the perceived risk of lending and the cost of funds. These loans are generally
repayable over a period of 6 to 10 years in annual, semi-annual or quarterly
installments.

8. g)Internal Accrual: This basically means what is being ploughed back in
business i.e., retained earnings and the depreciation charge. While depreciation
is used for replacing an old machinery etc., retained earnings can be used, for
finding other long-term requirements of the business.
Advantages
 Retained earnings are easily available internally.
 It eliminates issue and transaction cost.
 No dilution of control.
Disadvantages
 Only limited amount can be raised.
 High opportunity cost.

9. Issues of Securities
 Public Issue: Companies issue securities in the public in the primary market
and get them listed in the stock exchange. Initial public offerings are used by
companies to raise expansion capital, to possibly monetize the investments of
early private investors, and to become publicly traded enterprises. The issuer
obtains the assistance of an underwriting firm, which provide a valuable
service, which includes help with correctly assessing the value of shares (share
price), and establishing a public market for shares (initial sale).
 Private Placement: The sale of securities to a relatively small number of select
investors as a way of raising capital. Investors involved in private placements
are usually large banks, mutual funds, insurance companies and pension funds.
Private placement is the opposite of a public issue, in which securities are made
available for sale on the open market.

10.  Right Issue: A rights issue is an issue of rights to buy additional
securities in a company made to the company's existing security
holders. A rights issue is directly offered to all shareholders of record or
through broker dealers of record and may be exercised in full or
partially. Subscription rights may either be transferable, allowing the
subscription-rights holder to sell them privately, on the open market or
not at all. A rights issue to shareholders is generally made as a tax-free
dividend on a ratio basis (e.g. a dividend of one subscription right for
one share of Common stock issued and outstanding).

11.  Bought Out Deals: A bought deal is one form of financial arrangement often
associated with an Initial Public Offering. It occurs when an underwriter, such
as an investment bank or a syndicate, purchases securities from an issuer before
a preliminary prospectus is filed. The investment bank (or underwriter) acts as
principal rather than agent and thus actually "goes long" in the security. The
bank negotiates a price with the issuer (usually at a discount to the current
market price, if applicable).
Advantages of Bought Out deals are:-
 Bought deals are usually priced at a larger discount to market than fully
marketed deals, and thus may be easier to sell.
 The issuer/client may only be willing to do a deal if it is bought (as it eliminates
execution or market risk.

12.  Euro Issues: Simply when company taps the European Market for their
financial requirements especially for financing projects in the infrastructure
sector like power generation, telecommunication, petroleum exploration and
refining, ports, airports and roads. Where the resources are raised through the
mechanism of Euro Issues i.e., Global Depository Receipts (GDRs), Foreign
Currency Convertible Bonds (FCCB) and pure debt bonds. These investments
are issued abroad and listed and traded as a foreign stock exchange. Once they
are converted into equity, the underlying shares are listed and traded on the
domestic exchange.