seminar on sources of finance (1)

7/31/2019 Seminar on SOurces of Finance (1)

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Sources of Finance:


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Equity vs Debt Capital

Equity capital:represents thepersonal investment

of the owner (s) of acompany

Debt capital: thefinancing that a small

business owner hasborrowed and mustrepay with interest


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Sources of Equity Capital

Equity Capital -Personal savings

Preference Capital-

Friends and familymembers

Internal Accurals.

Venture capital


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Equity Capital

Ownership Capital

Equity shareholders collectively own thecompany

They enjoy the rewards and bear the risks ofownership.


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Rights to Equity shareholders

Right to INCOME

Right to CONTROL

PRE-EMPTIVE rights

Right in LIQUIDATION


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Advantages of Equity Capital

No compulsion to pay dividends

No maturity date

Enhances creditworthiness of the compant

Equity dividends are tax exempt in thehand of investors


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Disadvantages

Dilution of Control

Rate of return reqd by equity shareholders

is generally higher

Equity dividends are paid out of profitafter tax

Cost of issuing equity shares is high


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PREFERENCE CAPITAL

Hybrid form of Financing partakes somecharacteristics of equity & debentures.


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Resembles Equity:

Preference dividend is payable only out ofprofits.

Preference dividend is not a obligatorypayment.

Preference dividend is not a tax-

deductible payment.


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Resembles Debentures:

The dividend rate is usually fixed.

Claim of preference shareholders is prior

to the claim of equity shareholders.

No roght to vote.


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Types of Preference Capital:

Cumulative & Non Cumulative.

Participating & Non- Participating.

Redeemable & Non-Redeemable.

Convertible & Non-Convertible.


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Advantages of Preference shares

No legal obligation to pay didvidend

No redemption liability

No dilution of control under normalcircumstances


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Disadvantages

Not tax deductible

Skipping preference dividend can adversely

affect the image of the firm Preference share holders have prior claim to

equity holders on the assets n earnings of thefirm

If a firm skips preference dividends for 3 yrs, ithas to grant voting right to the preference shareholders


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INTERNAL ACCURALS

Depreciation charges

Retained Earnings.


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Advantages

Readily available

Eliminate issue costs & losses

No dilution of control


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Disadvantages

Amount available may be limited

Oppurtunity cost is high


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Debt Financing

Bonds

Term loans

Working Capital

advance

Miscellaneous


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DEBENTURES (Bonds)

A document or a certificate issued by acompany under its seal as anacknowledgement of its debt


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It is a viable alternative for Term loans. Debenture holders are the creditors of the

company. Debenture holders have the right to receive their

interest payments before any dividend is

payable to shareholders and, most importantly,even if a company makes a loss, it still has topay its interest charges.


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Characteristics of Debentures:

Borrowed Fund

Fixed rate of interest

Compulsory Payment of interest

Security

Redeemable No voting Rights

Appointment of Trustee.


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Types of Debentures:

Secured Debentures

Unsecured Debentures

Convertible Debentures

Non convertible Debentures


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Advantages of Debentures

Low cost

No dilution of Control

Intrest is treated as an expense

Low rate of Interest

Flexibility

Attract large number of investors


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Disadvantages

Fixed obligation

Reduction in Creditability

Charge on assets

No voting rights


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TERM LOANS

A loan is for a fixed amount with a fixedrepayment schedule and may appear on a

balance sheet with a specific name tellingthe reader exactly what the loan is and itsmain details.

It is generally repayable in less than10yrs.


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Features of Term Loans:

Currency

Security

Interest Payment & Principal Repayment

Restrictive Covenants


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Term loan procedure:

Submission of Loan application

Initial Processing of Loan

Appraisal of the Proposed Project

Issue of the Letter of Sanction

Acceptance of the Terms & Conditions bythe Borrower Unit


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Execution of Loan agreement

Creation of Security

Disbursement of Loans

Monitoring

Syndicated Loans


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Working Capital Advance

Amount needed to meet seasonal orcyclical demand

Like Short term loans


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Forms

Cash credits/ Overdrafts

Loans

Purchase/ Discount of bills

Letter of Credit


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Miscellanous

Deferred Credit

Lease Finance & Hire purchase

Unsecured Loans

Special Scheme of institutions

Subsides & Sales tax deferments &exemptions


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Short term loans from financial institution

Commercial paper

Factoring

Securitisation


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Venture Capital

capital contributed at an early stage in thedevelopment of a new enterprise, which

may have a significant chance of failure butalso a significant chance of providing aboveaverage returns and especially where theprovider of the capital expects to have some

influence over the direction of theenterprise. Venture Capital can be a highrisk strategy.


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Use more Equity when:

Tax rate applicable is negligible

Buisness risk exposure is high

Dilution of control is not an importantissue

Assets of the project are mostly

intangiable Project have many valuable growth

options


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Use of Debt when:

Tax rate applicable is high

Buisness risk exposure is low

Dilution of control is an issue

The assets of the project are mostlytangiable

Project has few growth options


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Key Factors in Determining The

Debt- Equity ratio: Cost

Nature of Assets

Buisness risk

Norms of Lenders

Control Considerations

Market conditions

seminar on sources of finance (1)

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