Sources of Finance

SOURCES OF FINANCE

  • Short-term: repayable within a year
  • Medium-term: between one and seven years
  • Long-term: longer than seven years

OVERDRAFT

  • Permission to overdraw on account up to a limit.
  • Arranged for few months or a year.
  • Interest charged on excess drawings.
Advantages of Overdraft
  • Flexibility to borrow up to a limit.
  • No need to forecast exact amount.
  • Quick repayment possible.
  • Interest paid only on the amount used.
Drawbacks of Overdraft
  • Right to withdraw facility on short notice.
  • High charges if limit exceeded.

TERM LOAN

  • Fixed amount loan for agreed time (3-7 years).
  • Provisions: repayment schedule, interest patterns, balloon/bullet payments.
  • Interest can be fixed or floating.

TRADE CREDIT

  • Simple and important financing source.
  • Payment terms usually 30 days; possible discounts for early payment.
Advantages of Trade Credit
  • Convenient, informal, and cheap.
  • Available to all company sizes.

FACTORING

  • Immediate cash transfer by a factor (up to 80% of invoice).
  • Fee comparable to overdraft; 2-3% above LIBOR.

HIRE PURCHASE

  • Equipment bought by HP company; payments allow usage.
  • Ownership transfers after all payments.
Advantages of Hire Purchase
  • Small initial outlay and easy arrangement.
  • Fixed rate; tax relief available.

LEASING

  • Similar to HP, but lessee does not own asset.
  • Two types: Operating and Financial leases (full cost recovery expected).

LONG-TERM DEBT FINANCE

  • Lower cost than equity finance.
  • Interested paid before dividends, less risky than equity.

DEBENTURES AND BONDS

  • Debentures: Secured bonds with fixed/floating charge.
  • Bonds: Long-term lending with periodic interest payments.
Bond Types
  • Zero coupon: No interest payments, issued at discount.
  • Convertible bond: Can be exchanged for shares at a future date.

PREFERENCE SHARES

  • Fixed rate dividends, paid before ordinary shares.
  • Not equity shareholders (no voting rights).

ISSUING SHARES

  • Involves compliance with regulations and prospectus creation.
  • Prospectus: Aimed at informing and marketing to potential shareholders.
Obligations After Going Public
  • Disclosure of price-sensitive information and regular financial statements.

ADVANTAGES/DISADVANTAGES OF BEING PUBLICLY TRADED

  • For: Access to capital, liquidity, discipline on management.
  • Against: Time-consuming, loss of control, high costs.

SECURITY FOR LOANS

  • Various forms including land, stocks, and personal guarantees.

REPAYMENT TERMS

  • Agreed schedules can meet borrower needs.
  • Management relationship important for securing loans.

WARRANTS

  • Rights to acquire shares at a future date and specified price.

SALE AND LEASEBACK

  • Selling assets for immediate cash, followed by leasing they back.

CONCLUSION

  • Understanding various funding sources important for effective financial management in corporate finance.
  • Each method has distinct advantages and disadvantages relevant to different business circumstances.