 Sources of Finance: Duration

Depending on the date of maturity, sources of finance can be clubbed into the following:

Long-term sources of finance: Long-term financing can be raised from the following sources:

 Share capital or equity share

 Preference shares
 Retained earnings
 Debentures/Bonds of different types
 Loans from financial institutions
 Loan from state financial corporation
 Loans from commercial banks
 Venture capital funding
 Asset securitisation
 International

Medium-term sources of finance: Medium-term financing can be raised from the following sources:

 Preference shares
 Debentures/bonds
 Public deposits/fixed deposits for duration of three years
 Commercial banks
 Financial institutions
 State financial corporations
 Lease financing / hire purchase financing
 External commercial borrowings
 Euro-issues
 Foreign currency bonds

Short term sources of finance: Short-term financing can be raised from the following sources:

 Trade credit
 Commercial banks
 Fixed deposits for a period of 1 year or less
 Advances received from customers
 Various short-term provisions

long term sources of finance:

Long term sources of finance are those that are needed over a longer period of time - generally over a
year.
A business requires funds to purchase fixed assets like land and building,
plant and machinery, furniture etc. These assets may be regarded as the
foundation of a business. The capital required for these assets is called
fixed capital. A part of the working capital is also of a permanent nature.
Funds required for this part of the working capital and for fixed capital
is called long term finance.

Shares:

Issue of shares is the important source of LTF. Shares are issued by the stock companies
to the public.the companies share capital is divided into equal units(say rs.10 each),each
unit is known as share.and the holders of the shares are called the share holders. Issuing
of shares is the best method of procurement of fixed capital as it has nt to be paid back to
the shareholders within the lyftym of the company.
The share may be defined as the unit measure of shareholders interest in the company.

Preference Shares :
Preference Shares are the shares which carry preferential rights over the
equity shares. These rights are (a) receiving dividends at a fixed rate, (b)
getting back the capital in case the company is wound-up. Investment in
these shares are safe, and a preference shareholder also gets dividend
regularly.
Equity Shares:
Equity shares are shares which do not enjoy any preferential right in the
matter of payment of dividend or reppayment of capital. The equity
shareholder gets dividend only after the payment of dividends to the
preference shares. There is no fixed rate of dividend for equity
shareholders. The rate of dividend depends upon the surplus profits. In
case of winding up of a company, the equity share capital is refunded
only after refunding the preference share capital. Equity shareholders
have the right to take part in the management of the company. However,
equity shares also carry more risk.

19.6 Debentures
Whenever a company wants to borrow a large amount of fund for a long
but fixed period, it can borrow from the general public by issuing loan
certificates called Debentures. The total amount to be borrowed is divided
into units of fixed amount say of Rs.100 each. These units are called
Debentures. These are offered to the public to subscribe in the same
manner as is done in the case of shares. A debenture is issued under the
common seal of the company. It is a written acknowledgement of money
borrowed. It specifies the terms and conditions, such as rate of interest,
time repayment, security offered, etc.
the debenture holders do not carry any voting rights.and in case a company fails to pay
interest on debentures or the principle amount,the debenture holders cover this up by
selling the assets of the company.

PLOUGHING BACK OF PROFITS/RETAINED EARNINGS:

Like individuals,the companies also set aside a part of the profit to meet future demands.
The phrase”plouging back of profit” means,the profits are not completely distributed to
the shareholders,but a part of profit is retained back or ploughed back in the company.this
profit is used in future by the company for expansion programmes,meeting working and
fixed capital needs etc…
Need for this:
1)purchasing new assets
2)replacement of old assets
3)meet working capital and fixed capital needs
4)repayment of debts

19.7 Public Deposits

It is a very old source of finance in India. When modern banks were not
there, people used to deposit their savings with business concerns of
good repute. Even today it is a very popular and convenient method of
raising medium term finance. The period for which business undertakings
accept public deposits ranges between six months to three years.
Procedure to raise funds through public deposits:
An undertaking which wants to raise funds through public deposits
advertises in the newspapers. The advertisement highlights the
achievements and future prospects of the undertaking and invites the
investors to deposit their savings with it. It declares the rate of interest
which may vary depending upon the period for which money is deposited.
It also declares the time and mode of payment of interest and the
repayment of deposits. A depositor may get his money back before the
date of repayment of deposits for which he will have to give notice in
advance.

Borrowing From Commercial Banks :

Traditionally, commercial banks in India do not grant long term loans.
They grant loans only for short period not extending one year. But recently
they have started giving loans for a long period. Commercial banks give
term loans i.e. for more than one year. The period of repayment of short
term loan is extended at intervals and in some cases loan is given directly
for a long period.

SHORT TERM SOURCES OF FINANCE:

After establishment of a business, funds are required to meet its day to

day expenses. For example raw materials must be purchased at regular
intervals, workers must be paid wages regularly, water and power charges
have to be paid regularly. Thus there is a continuous necessity of liquid
cash to be available for meeting these expenses. For financing such
requirements short-term funds are needed. The availability of short-term
funds is essential. Inadequacy of short-term funds may even lead to closure
of business.

TRADE CREDIT

An arrangement to buy goods or services on account, that is, without making immediate cash payment.

TRADE CREDIT IS THE CREDIT EXTENDED BY THE SUPPLIERS TO THE PRODUCERS AND THE TRADERS TO BUY
THE RAW MATERIALS AND OTHERS VALUBLES NOW,AND PAYMENT IS DONE LATER.THUS THE GOODS ARE
DELIVERED,BUT THE PAYMENT IS DONE ONLY WHEN THE PEIOD OF CREDIT EXPIRES.

2. Bank Credit
Commercial banks grant short-term finance to business firms which is
known as bank credit. When bank credit is granted, the borrower gets a
right to draw the amount of credit at one time or in instalments as and
when needed. Bank credit may be granted by way of loans, cash credit,
overdraft and discounted bills.
3. Customers’ Advances
Sometimes businessmen insist on their customers to make some
advance payment. It is generally asked when the value of order is
quite large or things ordered are very costly. Customers’ advance
represents a part of the payment towards price on the product (s)
which will be delivered at a later date. Customers generally agree
to make advances when such goods are not easily available in the
market or there is an urgent need of goods. A firm can meet its
short-term requirements with the help of customers’ advances.

Instalment credit is now-a-days a popular source of finance for

consumer goods like television, refrigerators as well as for
industrial goods. You might be aware of this system. Only a small
amount of money is paid at the time of delivery of such articles.
The balance is paid in a number of instalments. The supplier charges
interest for extending credit. The amount of interest is included
while deciding on the amount of instalment.

Sometimes commercial banks also grant instalment credit if they

have suitable arrangements with the suppliers.

5. Loans from Co-operative Banks

Co-operative banks are a good source to procure short-term
finance. Such banks have been established at local, district and
state levels. District Cooperative Banks are the federation of
primary credit societies. The State Cooperative Bank finances and
controls the District Cooperative Banks in the state. They are also
governed by Reserve Bank of India regulations. Some of these
banks like the Vaish Co-operative Bank was initially established as
a co-operative society and later converted into a bank. These banks
grant loans for personal as well as business purposes. Membership
is the primary condition for securing loan.