INVESTMENT BANKING Investment banking is a particular form of banking which finances capital requirements of an enterprises. Investment banking assists as it performs IPOs, private placement and bond offerings, acts as broker and carries through mergers and acquisitions. An investment bank is a financial institution that assists corporations and governments in raising capital by underwriting and acting as the agent in the issuance of securities. An investment bank also assists companies involved in mergers & acquisitions. Further it provides ancillary services such as market making and the trading of derivatives, fixed income instruments, foreign exchange, commodity, and equity securities. Unlike commercial banks and retail banks, investment banks do not take deposits.
FUNCTIONS OF INVESTMENT BANKING Investment banking help public and private corporations in issuing securities in the primary market, guarantee by standby underwriting or best efforts selling and foreign exchange management. Other services include acting as intermediaries in trading for clients. Investment banking provides financial advice to investors and serves them by assisting in purchasing securities, managing financial assets and trading securities. Investment banking differ from commercial banking in the sense that they don't accept deposits and grant retail loans. However the dividing line between the two fraternal twins have become flimsy with loans and securities becoming almost substitutable ways of raising funds. Small firms providing services of investment banking are called boutiques. These mainly specialize in bond trading, advising for mergers and acquisitions, providing technical analysis or program trading.
MERCHANT BANKING In banking, a merchant bank is a financial institution primarily engaged in offering financial services and advice to corporations and to wealthy individuals. The term can also be used to describe the private equity activities of banking. The chief distinction between an investment bank and a merchant bank is that a merchant bank invests its own capital in a client company whereas an investment bank purely distributes (and trades) the securities of that company in its capital raising role. Both merchant banks and investment banks provide fee based corporate advisory services, including in relation to mergers and acquisitions. a) The management of the customers securities b) The management of the portfolio, c) The management of projects and counseling as well as appraisal d) The management of underwriting of shares and debentures e) The circumvention of the syndication of loans f) Management of the interest and dividend etc
FACTORING A financing method in which a business owner sells accounts receivable at a discount to a third-party funding source to raise capital. One of the oldest forms of business financing. Common in industries such as clothing industry…. In a typical factoring arrangement, the client (you) makes a sale, delivers the product or service and generates an invoice. The factor (the funding source) buys the right to collect on that invoice by agreeing to pay you the invoice's face value less a discount--typically 2 to 6 percent. The factor pays 75 percent to 80 percent of the face value immediately and forwards the remainder (less the discount) when your customer pays.
C ONTD.. Because factors extend credit not to their clients but to their clients' customers, they are more concerned about the customers' ability to pay than the client's financial status. That means a company with creditworthy customers may be able to factor even if it can't qualify for a loan. Factoring is not a loan; it does not create a liability on the balance sheet. It is the sale of an asset--in this case, the invoice.
TYPES OF FACTORING (1) Maturity factoring: (also called service factoring), the factor maintains the seller's sales ledger, controls credit, follows up on the payments, and pays the amount (after deducting a commission) of each invoice as it falls due, whether or not the payment was collected. (2) Finance factoring: the factor advances funds to a producer or a manufacturing firm, on the security of produce or goods that will be produced or manufactured utilizing those funds. (3) Discount factoring: (also called service plus finance factoring) the factor advances a percentage (usually between 70% to 85% of the value of accounts receivable) to the seller on a non-recourse basis and assumes the full responsibility of collecting the debts. (4) Undisclosed factoring: a factor buys the goods from a primary party (producer, manufacturer, or seller) and then appoints the same party as its agent to resell those goods and to collect the payments. This arrangement prevents the disclosure that goods are being sold under a factoring agreement.
HIRE PURCHASE AND LEASING The acquisition of assets - particularly expensive capital equipment - is a major commitment for many businesses. The most common sources of medium term finance for investment in capital assets are Hire Purchase and Leasing. Leasing and hire purchase are financial facilities which allow a business to use an asset over a fixed period, in return for regular payments. The business customer chooses the equipment it requires and the finance company buys it on behalf of the business.
H IRE PURCHASE With a hire purchase agreement, after all the payments have been made, the business customer becomes the owner of the equipment. This ownership transfer either automatically or on payment of an option to purchase fee. For tax purposes, from the beginning of the agreement the business customer is treated as the owner of the equipment and so can claim capital allowances. Capital allowances can be a significant tax incentive for businesses to invest in new plant and machinery or to upgrade information systems. Under a hire purchase agreement, the business customer is normally responsible for maintenance of the equipment.
LEASING The fundamental characteristic of a lease is that ownership never passes to the business customer. Instead, the leasing company claims the capital allowances and passes some of the benefit on to the business customer, by way of reduced rental charges. The business customer can generally deduct the full cost of lease rentals from taxable income, as a trading expense. As with hire purchase, the business customer will normally be responsible for maintenance of the equipment.