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assets to buy
To decide Determining
what is total
tap the total
investment. making buying
Parameter for choosing sources of
• Cost of source of fund.
• Leverage planned by the company.
• Financial condition prevalent in the economy.
• Risk profile of both the company as well as the
industry in which the company operates.
Classification according to term
• Short term finance.
• Medium term finance.
• Long term finance.
Short Terms Finance
• Short term finance are required primarily to
meet working capital requirements.
• The focus is on maintaining liquidity at a
Working Capital Finance By
• Commercial banks grants short terms finance to
business firms which is known as “Bank Credit”.
• Bank Credit may be granted in the following
Purchase/ Discounting of bills.
• Trade credit represents credit granted by the
suppliers of goods, etc. as an incident of sale.
Credit for the purpose Less flexible
of raw material or
No interest payable
Inter Corporate deposits
• A deposit made by one company to another is
called as inter-corporate deposit.
• It is generally for working capital funding & is
for period not exceeding six months.
Factoring is an agreement in which receivable
arising out of sale are sold by a firm (client) to
the factor (a financial intermediary).
• Establish a strong foundation.
• Maximize profitability.
• Capture growth opportunities.
• Possible harm to customer relation.
• Company image distortion.
Commercial Paper (CP)
Commercial paper is an unsecured money
market instrument issued in the form of a
• High credit ratings
• Provides exit options.
• Limited applicability.
• Low bank credit limits.
• A high degree of control.
Medium Term Finance
Medium term finance is defined as money
raised for a period for 1 to 5 years.
The medium term funds are required by a
business mostly for the repaired and
modernizing of machinery.
Medium Term Finance
Banks & External Euro &
State Commercial Foreign
Financial Borrowings Bonds
• It is a contract In which the assets is purchased
initially by the lessor(leasing company) and
thereafter leased to the user(leasee company)
who pays a specified rent at periodical intervals.
Advantages & Disadvantage
The holder only pays Commitment to contract
for use. for entire valid period.
Better liquidity. Higher fixed cost per
More expensive than
Minimal sales risk. purchase.
• Hire purchase transaction, the goods are
delivered by the owner to another person the
agreement that such person pays the agreed
amount in the periodical installment.
• Cheaper than a • Higher monthly
(‘unsecured’) personal payment;
• relatively quick. • hidden fees
• Deposits are lower than
with personal loans.
1. ECB’s refer to commercial loan in the form of bank
loans, buyers credit, suppliers credit, securitized
instruments.(E.g. Floating rates notes and Fixed
rates bonds) availed from non-resident lenders with
minimum average maturity years.
2. ECBs mean foreign currency loan raised by residents
from recognized lenders. Financial leases and Foreign
Currency Convertible Bonds are also covered by ECB
• Definition of Euro Bond::--
“A bond issued in a
currency other than the currency of the country
or market in which it is issued.”
• Eurobonds are attractive to investors as they have
small par values and high liquidity.
• Increased liquidity of European bond markets.
• Protection from large market shocks and erratic
• Discipline, guaranteed funding for all EMU
The main disadvantages are :
• Possible free-riding problems.
• Tensions with the no-bailout clause.
• Credibility and political viability.
Definition::--Foreign bonds are the debt
instruments issued by foreign
corporation or foreign government.
Long Term Finance
• Long term finance refer to those requirements
of funds which are for a period exceeding 5-10
term New Debt
A shares indicates a smaller unit into which the
overall requirement of a company is subdivided.
TYPES OF SHARES
THERE ARE TWO TYPES:
• It means a document containing
acknowledgement of indebtedness issued by a
company and giving an undertaking to repay
the debt at a specified date.
NEW DEBT INSTRUMENT
• Zero interest bond (ZIB)
• Deep discount bonds (DDB)
• Junk bonds
• Convertible debenture
• Retained earnings means that part of trading
profits which is not distributed in the form of
dividends but retained by directors for future
expansion of the company.
Global/ American/ Indian
• GDRs :-
A negotiable certificate held in the bank of one country
representing no. of shares traded on the exchange of
• ADRs :-
It allows US investors to buy shares of ADS companies
without the cost of investing directly in Foreign Stock
• IDRs :-
It allows foreign companies to raise the funds from
• The venture capital financing refers to
financing & funding of the small scale
enterprises, high technology & risky volumes.
• Securitization is a process in which illiquid
assets are pooled into marketable securities
that can be sold to investors.
Reduces assets liability Cost
Locking in profits Size limitation
Some Important Sources Of Finance
• Seed capital assistance.
• Certificate of deposit.
• Internal cash accrual
Seed capital assistance
• Designed by IDBI.
• 1% service charge for 5 years.
Certificate of deposit
• CD is a document of title similar to a time deposit
receipt issued by a bank exepct that there is no
prescribe interest rate on such funds.
• The main advantage of cd is the baker is not required
to encash the deposit before maturity period and the
investor is assured of liquidity because he can sell the
cd in secondary market.
Internal cash Accruals
• Existing profit making companies which
undertake an expansion programe may be
permitted to invest a part of their
accumulated reserves or cash profit for
creation of capital assets.
Example Of Long Term & Short Term
Standard Chartered Bank Mahindra Finance
Equity capital = 58% Equity capital = 42%
Internal accrual (reserve & surplus) =24% Internal accrual (reserve & surplus) =12%
Debentures (bonds) = 20% Debentures (bonds) = 33%
Term (long term) = 8% Term (long & short term) = 13%
Comparison Between both the
More hold on the companies proceedings & Less hold as compare to SCB but have a
company is having high goodwill in the good hold and goodwill in the market.
Company can skip dividends on equity shares Company can skip dividends on equity shares
more than Mahindra finance. but less as compared to SCB.
The company is having low tax deductible More debentures means more tax deductible
Low debt contract means less restrictions on High debt contract can lead to impose
the company. restrictions.
Low percentage of term loans means High percentage of term loans means
company is having less dependence on the company is having high dependence on the
outside sources of finance. outside sources of finance.