Sources of Finance PDF

Sources of Finance b.Com vi sem prof.Vivek chavan Dr.M.W.P.W.S. ARTS AND COMMERCE COLLEGE 1  Why do we need to study finance? Almost half of all new ventures fail because of poor financial management 2 What i...

Sources of Finance b.Com vi sem prof.Vivek chavan Dr.M.W.P.W.S. ARTS AND COMMERCE COLLEGE 1  Why do we need to study finance? Almost half of all new ventures fail because of poor financial management 2 What is Finance?  Who needs money? ◼ Every one? you? ◼ Can you or a business survive without cash? Why?  So what is Finance? ◼ First, how to have money ◼… 3 Personal finance  Where does money for individuals (personal finance) come from: ◼ Our own money in pocket ◼ Borrows: from friends or credit cards ◼ Received from Government if entitled to some benefits ◼ Earned by doing something or sales of products and services 4 Business finance  Business finance: a business has the same source of money for individuals ◼ Its own money ◼ Borrows: from friends, colleagues, banks and lending institutions ◼ Received from Government grants. Eg. new in deprived sectors ◼ Earned by sales of products and services ◼ From venture capitalists (seeking profit for spare funds) ◼ From private individuals (Business Angels – often seen in entertainment sector) ◼ Private companies ◼ Microloans 5 To obtain funding for a business project  Determine how much money is needed to start your company  Prove to your investor that your company requires the predetermined amount of money  Offer incentives, interest, or collateral for the investor’s contribution  Make arrangements to pay back the loan 6 Classifying businesses  Each type of business can have different ways to finance itself, so we need to look at types of business ownerships ◼ Sole trader – owned by one person ◼ Partnership – owned by two or more and based on agreement among them ◼ Limited company: owned by two or more but separate in law from people who own and control 7  Business Forms Sole Partnerships Corporations Hybrids Proprietorships 8 Sources of Finance 9 Business Growth External  Long Term  Short Term  'Inorganic Growth‘ 10 Business Growth External  Long Term ◼ Shares  Ordinary Shares  Preference Shares  New share issues  Rights Issue  Bonus or Scrip Issue ◼ Loans  Debentures  Bank loans (mortgage)  Merchant or Investment Banks  Government/EU ◼ Grants 11 Business Growth External  Short Term ◼ Bank loans ◼ Overdraft facilities ◼ Trade credit ◼ Factoring ◼ Invoice discounting ◼ Leasing 12 Business Growth External 'Inorganic Growth' ◼ Acquisitions Merger Takeover 13 External Sources of Finance  Long Term – may be paid back after many years or not at all!  Short Term – used to cover fluctuations in cash flow  ‘Inorganic Growth’ – growth generated by acquisition 14 Long term (Means?)  Loans (Represent creditors to the company – not owners) ◼ Bank loans and mortgages – suitable for small to medium sized firms where property or some other asset acts as security for the loan  A mortgage loan is a loan secured by real property ◼ Merchant or Investment Banks – act on behalf of clients to organise and underwrite raising finance ◼ Government/EU – may offer loans in certain circumstances  Grants  Shares (Shareholders are part owners of a company only in PLC’s) ◼ New Share Issues – arranged by investment banks. 15 Short Term  Bank loans – necessity of paying interest on the payment, repayment periods from 1 year upwards but generally no longer than 5 or 10 years at most  Overdraft facilities – the right to be able to withdraw funds you do not currently have ◼ Provides flexibility for a firm ◼ Interest only paid on the amount overdrawn ◼ Overdraft limit – the maximum amount allowed to be drawn - the firm does not have to use all of this limit  Trade credit – Careful management of trade credit can help ease cash flow – usually between 28 and 90 days to pay  Factoring – the sale of debt to a specialist firm who secures payment and charges a commission for the service.  Leasing – provides the opportunity to secure the use of capital without ownership – effectively a hire agreement 16 17