Resources of Finance

Financing is called a life blood of business because finance is prerequisite for mobilization real resources and marketing activities. There are two types of resources. Such as, Real resources (Land, building, machinery) Financial resources. Depending on the nature of activities to be financed, business requires short term, medium term and long term finances. So, on the basis of time horizon, financing requirements of a business is categorized as in: Short Term Source of Finance Medium Term Long Term

Short term finance:

Short term finance usually refers to funds required for a period of less then 1 (one) year. It consists of obligations of business that are expected to mature in one or less period time. Short term finance is needed to meet variable and temporary working capital requirements or to finance the current assets need of the fund. Short term finance could be two types: 1. Unsecured sources of short term finance. 2. Secured sources of short term finance.

1. Unsecured sources of short term finance: Unsecured sources of short term finance is consists of
funds raise by the firm without pledging any asset as collateral. Unsecured source of short term finance may be three way. Such as, Spontaneous Banks Non banks Money market credit Spontaneous: Which raises automatically during the course of conducting the business. It has two subdivisions: Account payables or trade credit and Accruals or accrued (arising from wage and tax A/C. [Note: FLOWT TIME = Time between selling and receiving the goods] Account payables or trade credit: Accounts payables are created by a firm/business/company through purchase of raw materials and other goods on Open Account or credit. No formal security is given for such purchase, rather both parties signing a Credit term. [Example: Credit term: 3/15 net 45EOM or 2/10 net 30EOM] When the suppliers do not extend the trade credit for a longer period to the customer, they often design the credit term adding a clause called COD Cash on Deliver. In some cases the suppliers may requires payment indicating a clause CBD Cash before Delivery. Benefits of trade credit: 1. Its more frequently use in business. 2. Easy to obtain 3. Flexible in nature 4. Informal and 5. Less risky. Accruals or accrued (arising from wage and tax A/C: Accruals or accrued expenses represent these items that have already incurred but not yet paid. Wages or Tax dues are the examples of such sources. Such sources of financing are costless to a fund.

Banks: This source of financing is called negotiated unsecured finance from the banks. Which are
following types: Notes Line of credit Revolving credit Notes: A single payment loan given by a bank to a credit worthy customer. This is also called one short deal. Where any customer needs urgent additional funds for a vary short time may approaches to a bank and the document against which the loan is given has to be signed by the customer is called notes. Line of credit: It is an agreement between the bank and a business/ a customer which ensures the client to provide short term unsecured loans to a borrower subject to availability of sufficient fund in the bank. Normally there is a limit of credit mentioned in the agreement. The borrower can draw and deposit within the limit for a specified period. Revolving credit: It is a granted Line of credit. Commercial paper Banks acceptance Commercial paper: It is an unsecured short term source of finance. Its also like short term bond and maturity days will be 290 days. Blue chips company issue this type of commercial paper. Blue chips company is famous company which have large price of their product also popularity of products. Banks acceptance: When commercial paper issued by banks then its called banks acceptance.

Money market credit: It may be two type of:

2. Secured sources of short-term finance: Normally there are three sources:

a) Bills/Accounts receivables b) Use of Inventory a) Bills/Accounts receivables: Two commonly used means of obtaining short-term financing with accounts receivables are pledging accounts receivable and factoring accounts/bills receivable. A pledge of accounts receivable is often used to secure a short-term finance. Because accounts receivable are normally quite liquid, they are an attractive form of short-term loan collateral. Discounting/selling the bills to some of financing institutes is called financing by factoring accounts/bills receivable. Factoring is exercise by some specialized financial institutes or banks. Factoring means buy the bills at discounted rate and receiving the full proceeds by the factoring issues of maturity.

b) Use of inventory: Inventory has three materials:

Raw materials Working capitals Finish goods By assigning some part of interest of the goods by pledging.

Medium/Intermediate term financing:

Normally any finance having maturity of more than one year but less than five years its consider intermediate/medium/term financing. It has some characteristics which are given bellow: 1. Maturity one-five years. 2. Size of the loan is normally not very big but greater than short-term and less the long-term finance. 3. Users of term/intermediate financing: Business: Business of all sizes need medium term finance. Usually the firms which has not entrance to the capital market they can use medium term financing by specialized banks, commercial banks etc. Normally the firms uses medium term finance in terms of to finance their fixed assets.

4. Repayment procedure: Normally term loan/medium term loan are repaying by installments basis but sometimes it is repaid by a single repayment. Repayment procedure depends on the agreement between borrower and lender. 5. Security provision: Since term loan are for a longer periodic time and are use to purchase long term assets, such as secured by there fixed assets. 6. Cost term: Normally cost of the term loan is its paid of interest. Normally rate of interest of term loan is relatively less than long term financing but greater than the short term sources of financing.

Types of intermediate/medium/term finance:

1. Bank term loan: Normally the commercial banks provides term loan for a period of one year or more and it is back by repayment schedule. 2. Revolving credit: Revolving credit has two element of cost. One is regular interest on the withdrawn portion and another is commitment fees that means undrawn portion. 3. Insurance companys term loan: Insurance company could also be provides term loan. 4. Equipment financing:

5. Lease financing:

Long term financing sources:

Arrangements of any firms in a business for period exceeding 10 years is usually considered as long term financing. Why the firms need this type of finance?

Reason for having long term finance:

1. 2. 3. 4. 5. Procurement of different fixed assets. For setting up new business. Expansion of the existing business. Extension of the business. Balancing and modernization of existing business.

The important sources of long term finances are: 1. Issue of shares 2. Issue of bonds 3. Loans from specialized financial institutions and 4. Plowing back/retained earnings of profit. Q. Discuss the corporate securities? Ans:- term instruments are called in one sentence as corporate securities. Ownership securities (shares) Preferred shares and common shares(equity) Corporate securities Creditor ship securities (bonds)

Ownership securities:
Preference shares: Preference shares are those shares which have preferential rights to the payment of dividend and to the return of capital in case of liquidation.

The features of preference shareholders are: 1. The dividend is fixed. 2. They receive the dividend before the common shareholders. 3. They receive their capital back before common shareholder and they get their capital back if they are redeemable shares. 4. Preference shareholders do not have voting rights in company affairs. The features of common/ordinary/equity shareholders are: 1. They do not have fixed rate of dividend. 2. They are entitled to dividend after preference shareholders. 3. Thirdly similar things happen in case of liquidation of the business. 4. Equity shares are always irredeemable. 5. They have voting rights in company affairs. Creditor ship securities: Bond is one of the creditor ship securities. Bond: Bond is a long term debt instruments in which the issuing company promises to pay interest periodically at a stated rate of interest and the principal at maturity. Features of Bond: 1. It has a face value. 2. It is followed by a coupon rate/interest rate. 3. There has to be maturity period. 4. The name of issuing company. 5. Date of issue. 6. Rights and privilege of issuing company and buyers. [Note: The bond which have no interest rate but it is sold in less than face value of bond. After maturity period it can be placed at face value.] There are two legal protection for bond holders: 1. Bond indenture. 2. There is a trustee. 1. Bond indenture: It is a paper which have all features of band in printed document. It is a legal documents stating the conditions under which the bond has been issued. Its specifies both the rights of the bond holders and obligations of the issuing companys. 2. Trustee: A fixed party which guaranties the adherence of the conditions in the indenture. The trustee acts as watch-dogs on behalf of the bond holders to protect their interest. Types of bond: There are two types of bond. Such as- a) Secured and b) Unsecured bond. a) Secured bond: It is categorized into three types. Such as Mortgage bonds Collateral bonds Equipment bonds b) Unsecured bond: It is two types. Such as Debenture Sub-ordinate debenture

Cost of long term financing: The cost structure of long term financing is influenced by:
1. The maturity of the loan. 2. Size of the loan. 3. Financial creditability of the borrower. 4. Cost of funds to the lender. Processing or issuing corporate long term securities: 1. New issues of long term securities are concerned with both new firms and existing firms. New issues come to market through: Public issue. Direct placement. Special issues (right shares, bonus shares and employees shares).