Presentation on theme: "Sources of Business Finance"— Presentation transcript:
1 Sources of Business Finance Owner’s FundBorrowed funds’ refer to the funds raised through loans or borrowings. The sources for raising borrowed funds include loans from commercial banks, loans from financial institutions, issue of debentures, public deposits and trade credit. Such sources provide funds for a specified period, on certain terms and conditions and have to be repaid after the expiry of that period.Borrowed FundDebenturesPublic DepositsLoans from BanksTrade Credit
2 Borrowed Fund Highlights Debentures Debentures are an important instrument for raising long term debt capital. A company can raise funds through issue of debentures, which bear a fixed rate of interest. The debenture issued by a company is an acknowledgment that the company has borrowed a certain amount of money, which it promises to repay at a future date.HighlightsDebentures carries a fixed rate of interest as the return to its holders.Debenture holders are the creditors of the company.Public issue of debentures requiresthat the issue be rated by a creditrating agency like CRISIL (CreditRating and Information Services ofIndia Ltd.)Debentures are generally consideredas the less risky on the point of viewof the investors as it carries a fixedinterest.
3 Advantages Debentures Borrowed FundAdvantages DebenturesDebenturesLess RiskSuitable for stablecompaniesEconomic Source ofFinanceNo Profit sharingOn the view point of the investors debentures seems to be less risky as it provides a fixed rate of return on their investment. hence it is preferred by investors who want fixed income at lesser risk.Control
4 Advantages Debentures Borrowed FundAdvantages DebenturesDebenturesLess RiskThe issue of debentures is suitable in the situation when the sales and earnings are relatively stable, because under such situations the companies can pay the interest without default.Suitable for stablecompaniesEconomic Source ofFinanceNo Profit sharingControl
5 Advantages Debentures Borrowed FundAdvantages DebenturesDebenturesLess RiskFinancing through debentures isless costly as compared to cost ofpreference or equity capital as the interest payment on debentures is tax deductible.Suitable for stablecompaniesEconomic Source ofFinanceNo Profit sharingControl
6 Advantages Debentures Borrowed FundAdvantages DebenturesDebenturesLess RiskDebentures are fixed charge funds carrying interest as the return to the investor. Hence it is not necessary to distribute the profit of the company among the debenture holders.Suitable for stablecompaniesEconomic Source ofFinanceNo Profit sharingControl
7 Advantages Debentures Borrowed FundAdvantages DebenturesDebenturesLess RiskNo Voting RightSuitable for stablecompaniesEconomic Source ofFinanceNo Profit sharingAs debentures do not carry voting rights and hence financing through debentures does not dilute control of equity shareholders onManagement.Control
8 Borrowed Fund Commercial Banks Commercial banks occupy a vital position as they provide funds for different purposes as well as for different time periods. Banks extend loans to firms of all sizes and in many ways, like cash credits, overdrafts, term loans, purchase/ discounting of bills, and issue of letter of credit.Not a permanent source of finance.Financial assistance on the basis of collateral security.Loan cam be repaid in either lump sum or in installments.Rate of interest may vary depending on the period of repayment, nature of loan etc.Flexible source of finance.
10 Advantages Debentures Borrowed FundAdvantages DebenturesCommercial BanksTimely AssistanceSecrecy of BusinessLess FormalitiesFlexible source of FinanceCommercial Banks provide timely assistance to business by providing funds as and when needed by it. Hence it proved to be a reliable source of finance to the firms.
11 Advantages Debentures Borrowed FundAdvantages DebenturesCommercial BanksTimely AssistanceCommercial banks does not disclose the account details of its customers to others. Hence the Secrecy of business can be maintained and the information supplied to the bank by the borrowers is kept confidentialSecrecy of BusinessLess FormalitiesFlexible Source of Finance
12 Advantages Debentures Borrowed FundAdvantages DebenturesCommercial BanksTimely AssistanceLoans from commercial banks are less formal as compared to issue of shares as the formalities such as issue of prospectus and underwriting are not required for raising loans from a bank.Secrecy of BusinessLess FormalitiesNo prospectusFlexible Source of FinanceNo underwriting
13 Advantages Debentures Borrowed FundAdvantages DebenturesCommercial BanksTimely AssistanceLoan from a bank is a flexiblesource of finance as the loanamount can be increasedaccording to business needs andcan be repaid in advance whenfunds are not needed.Secrecy of BusinessLess FormalitiesFlexible AmountEasy RepaymentsFlexible Source of Finance
14 Borrowed Fund Public Deposit The deposits that are raised by organisations directly from the public are known as public deposits. Rates of interest offered on public deposits are usually higher than that offered on bank deposits. Any person who is interested in depositing money in an organisation can do so by filling up a prescribed form.Suitable for short term andmedium term finance.Simple procedures than a loan agreement.Less Costly as compared to loansand other sources.Public deposits do not usuallycreate any charge on the assetsof the company.As the depositors do not havevoting rights, the control of thecompany is not diluted.
15 Borrowed Fund Trade Credit Trade credit is the credit extended by one trader to another for the purchase of goods and services. Trade credit facilitates the purchase of supplies without immediate payment. Such credit appears in the records of the buyer of goods as ‘sundry creditors’ or ‘accounts payable’.Advantages of Trade CreditConvenient andcontinuous source of funds.Trade credit may be readilyavailable in case the credit worthiness of the customers is known to the seller.Trade credit needs to promotethe sales of an organization.It does not create any charge onthe assets of the firm whileproviding funds.