Source of funds

Nikhil Krishnan R

Classification Of Source Of Funds On

The Basis Of Periods
Long term funds
Medium term funds
Short term funds

Long Term funds

Equity shares
Preference shares
Debentures
Retained earnings
Loans from financial Institutions
Loans from banks
Lease financing
Venture capital

Medium term funds

Loans from banks

Public deposits
Loan from financial institutions
Lease financing

Short term funds

Trade creditors
Factoring
Loans from banks
Commercial paper

Equity shares
Owners capital of the company
Full control over the working capital
of the company
Having voting rights

Advantages
Permanent capital
Repaid at the time of
liquidation
Suitable for investors
who are willing to
assume for higher
returns

Disadvantages
Trading on equity is
not possible if the
entire capital structure
is composed of equity
shares
Entire capital consist
of equity shares,
shareholders may try
to control the entire
undertaking which
may be.

Preference shares
Who carry preference right
Rate of dividend on a preference
share is fixed rate
Shareholders will entitled to a further
share of dividend after dividend at a
certain rate has been paid on equity

the equity base of the

company and so
strengthen its financial
position
preference shares save the
company from paying
Advantages
higher rate of interest
Issue of the preference
shares does not create any
sort of charge against
assets of the company
Financing through
preference shares is
cheaper than that of equity
financing

Disadvantages

Preference dividend is not

deductible as an expense
for taxation purpose out of
the profits of the company
Compulsory redemption of
preferences shares on
maturity will lead to
substantial outflow of cash
The cost of capital of
preference shares is higher
than of cost of dept

Debentures
A debentures is an instrument acknowledging a
debt under the seal of the company usually
secured by a fixed on floating charge on the
castes of the company bearing a fixed rate of
interest and repayable within or after a specified
period or irredeemable during the existence of
the company

Advantages

Disadvantages

It provide long term

finance to a company
The rate of interest
payable is less than the
rate of dividend on shares
Debt finance does not
dilute control

It is permanent burden on
the company to repay the
principle on maturity
It is not desirable to issue
debentures by a company
having irregular earnings
Charge on the asset of the
company restrict from the
use of debentures
financing

Financial institutions

commercial banks and specialized

institution provide Long term fund to
corporation. The bank which provide
financial assistance to the industry for the
economic development of the country are
known as development bank.

Advantages
Availability of finance at
reasonable rate of
interest
Facility of underwriting
and equity participation
of new companies
Facility of repayment in
easy installments
Reasonable security
requirement for loan
assistance

Loan from banks

Bank credit refers to an agreement where
by the bank allows the customers to over
draft from its current deposit account
within a specified limit the over draft
facility is granted against the securities of
assets or personal security as in case of
cash credit interest is charged only on the
amount actually overdrawn

Advantages

Disadvantages

Timely assistance
Flexibility
Non interference with
management
Information supplied
to the bank is treated
in utmost confidence

Burden of mortgage or
hypothecation
Short duration of
assistance
Cumbersome terms

Public deposit
Firms may be mobilize savings from
the general public and it is termed as
public deposit. It is very cold systems
of financing.
Public deposits can be accepted by
non banking companies for a
minimum of three months for short
term deposits and six months for
other deposits

Advantages

Disadvantages

It is less costly method

for raising short term as
well medium term funds
required by the
business.
There is no need of
creation of any charge
against any of the asset
of the company for
raising fund through
public deposit.

Uncertain and
unreliable
Unhealthy for capital
marker
Uneconomical
Difficulty of collection

Trade credit
Trade credit is the credit extended by one
trader to another for the purchase of
goods and services.
sellers or suppliers of different kind of
products or raw material provide credit to
their customers . The credit offered by the
seller or supplier is known as trade credit
or bills payable.

Advantages
It is convenient and
continuous source of
funds
Readily available in
case the credit
worthiness of the
customer is known to
the seller
It needs to promote
the sale of
organization

Disadvantages
Only limited amount of
funds can be
generated through
trade credit
It is generally a cost to
source of funds as
compared to some
other source of raising
money

Factoring
Factoring is a financial service which involves
meaning financing and collection receivable .It
is both of financial as well as management
support to suppliers of goods /services
It is method of converting non productive
assets a factor make the conversion or
receivable in to cash possible factoring may
be defined as a contract between the suppliers
of goods services and the factor under which
the factor agrees to perform at least two of
age following function

Advantages

estimating trade discount

Prompt payment and credit
Improves scope for
operating leverage
Improvement of liquidity
Provides insurance against
bad debts
It avoids increased debts

Disadvantages
Image the client may suffer as
engaging of a factoring agency
is not considered as a good
sign of efficient management
Factoring may not be of much
use where companies have
nation wide net work branches
Financial evaluation may not
be accurate
If the client has cheaper
means of finance and credit
factoring may not be useful

Lease financing
It is a contractual agreement where by one
party ie the owner of an asset grants the
other party the right to use the assets in
return for a periodic payment
It is a renting of an assets for some
specific period.

Advantages
Lease rental paid by
the lesser are
deductible for
computing taxable
profit
Simple documentation
makes it easer to
finance assets
It provide finance
without diluting the
ownership on control
of business

Disadvantages
Normal business
operations may be
affected in case the
lease is not renewed
Lease arrangement
may impose certain
restrictions on the use
of assets
Lessee never becomes
the owner of the asset

Commercial paper
It is a short term money market
instrument . it is a promissory note which
is negotiable by endorsement and fit for
delivery with a fixed maturity period
between one month to one year. It help to
raise short term deal at attractive rates.

 It is sold on an
unsecured basis and
doesnt contain any
Advantages
restrictive conditions.
It provide a continuous
source of funds
Companies can park
their excess fund in
commercial paper
there by earning some
goods return on the
same.

Disadvantages
This form of financing
is not a reliable and
dependable one and
as such it is difficult to
formulate the financial
plan on the basis of it.
It is inelastic source of
finance.

Venture capital
Venture capital refers financing of new
high risky venture promoted by highly
qualified entrepreneurs who lack
experiences and funds to give shape to
the ideas .In a broad sense under venture
capital financing venture capitalist make
investment to purchase equity or debt
securities from experienced entrepreneurs
who undertake highly risky venture with
potential of success

Advantages
Business expertise
New innovative
projects are fixed, it
offers high profitability
in long run
It provides value
information resources
to more business
successfully

Classification Of Source Of Funds On

The Basis Of Risk
Owned capital
Borrowed capital

Classification Of Source Of Funds On

The Basis Of Finance
Internal sources
External sources

Classification Of Source Of Funds On

The Basis Of Time
Long term capital
Medium term capital
Short term capital

Classification Of Source Of Funds On

The Basis Of Purpose
Fixed capital
Working capital

Thank you