DEBT FINANCINGKUNWAR ATUL SINGH

INSTITUTE OF MANAGEMENT STUDIES (FMS), BHUMBA III SEM.ROLL NO. 20

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DEBT

Debt is an amount of money borrowed by one party from another.

Debt instruments indicating that company has borrowed certain sum of money and promise to repay it in future under clearly defined terms.

Debt consists of term loan, debentures, commercial papers, over draft, public deposits, corporate deposits, discounting.

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SOURCE OF DEBT FINANCING

• Trade Credit• Bank Credit• Commercial Paper• Factoring

Working

Capital

• Debentures• Term Loan• Securitisation

Long Term

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Working Capital Financing

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TRADE CREDIT

Trade credit is the credit extended by suppliers of goods and services in the normal course of business.

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BANK CREDIT

Bank Credit

Cash Credit/

Overdraft

LoansPurchase

/ Discount

bills

Letter of credit

W.C .Term Loan

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Cash Credit / Overdraft Under cash credit/ overdraft form/ arrangement of

bank finance, the bank specifies a predetermined borrowing/ credit limit. The borrower can up stipulated credit/ overdraft limit.

Limit is called as Line of Credit Line of Credit is an agreement between a bank and a

firm specifying the amount of short term borrowing the bank would make available to the firm over a given period of time.

Purchase/ Discount of Bills The seller of goods draws the bill on the purchaser .

The seller’s bank purchase/ discount the bill and sends it to the buyer’s bank for collection. The buyer’s bank release the documents to the buyer on receipt on payment in case of demand bill or on buyer accepting to pay on due date, in case of usance bill, which does not exceed 90 days.

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Letter of Credit Letter of credit is a letter written by a bank

stating that the bank guarantees payment of invoiced amount if all the underlying agreements are met.

Working Capital Term Loan Under this arrangement, banks advance loans for

for 3-5 years repayable in yearly or half -yearly instalments.

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COMMERCIAL PAPERS

Commercial Paper is form of financing consisting of short term insecured promissory notes issued by a firm with high credit rating.

90-180 days.

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CERTIFICATES OF DEPOSITS

Certificates of deposit is a marketable receipt of funds deposited in banks for a fixed period at a specified rate of interest.

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FACTORING Factoring can be defined as an agreement in

which receivables arising out of sale of goods/ services are sold by a firm (client) to the factor (a financial intermediary) as a result of which the title of goods/ services passes on the factor.

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CLIENT(SELLER)

CUSTOMER(BUYER)

FACTOR

1. Placed Order2. Delivers

goods & invoice with notice to pay the factor

6.Follow

up

7.Pays

8.Pays

Balance amount

5.Payabl

eup to 80%

4.Sends Invoic

e Copy

2. Fixes customer limit

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INTER-CORPORATE DEPOSITS

A deposit made by one company wit another company, normally for a period up to 6 months, is referred to as an inter-corporate deposit.

Three types Call Deposits – withdrawable on giving a day’s

notice Three months deposits Six months deposits

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PUBLIC DEPOSITS

Unsecured deposits from the public Interest rate varying 8-12%

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RIGHTS DEBENTURES FOR WC

Public limited companies can issue “rights” debentures to their shareholders with the object of augmenting the long-term resources of the company for working capital requirement.

Debt equity ratio should not exceed 1:1 Debenture issued should not exceed (a) 20%

of the gross current assets (b) 20% of the paid up share capital.

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Long Term Debt Financing

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DEBENTURE

It is a long term security yielding a fixed rate of interest, issued by a company.

Types of Debenture Convertible & Non Convertible Redeemable & Irredeemable Secured & Unsecured

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LONG TERM LOAN

Term loan is a loan made by a bank/ financial institution to a business having an initial maturity of more than 1 year

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SECURITISATION

Securitisation is a process of pooling and repackaging of homogeneous illiquid financial assets into marketable securities that can be sold to investors. The assets are generally secured by personal or real property such as real estate, automobiles or equipment loans.

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Thank you.....

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