SourceOfFinance
Source of Finance Overview
Introduction to Finance
Finance is the provision of money at the right time.
Essential for all enterprises regardless of size (big, medium, small).
Often referred to as the "life blood" of an enterprise.
Importance of Finance
Setting up a business: Necessary for initial investments.
Day-to-day operations: Required for ongoing expenses.
Expansion: Funding needed to grow the business.
Research: Financing necessary for development of new products.
Special situations: Such as decline in sales necessitating financial support.
Classification of Financial Sources
1. By Period
Long Term: More than 5 years (e.g., equity shares, preference shares, loans).
Medium Term: More than 1 year but less than 5 years (e.g., loans from banks, public deposits).
Short Term: Less than 1 year (e.g., trade credit, factoring).
2. By Ownership
Owners Fund (Equity): Includes equity shares and retained earnings.
Borrowed Funds: Includes debentures and loans.
3. By Source of Generation
Internal Sources: E.g., equity share capital, retained earnings.
External Sources: E.g., loans from banks and financial institutions, public deposits, debentures.
Long Term Financing
Definition and Usage
Sources that fulfill long-term financial needs (over 5 years).
Used for:
Financing fixed assets.
Company expansions.
Increasing operational facilities.
Large scale project constructions.
Acquisitions of other companies.
Sources of Long Term Finance
Shares:
Equity Shares: Shareholders share profits and losses, viewed as real owners.
Preference Shares: Holders receive fixed dividends with priority over equity dividends.
Debentures: Represent borrowed capital; debenture holders are creditors with fixed interest returns.
Retained Earnings: Profits not distributed as dividends, used for further investment activities.
Medium Term Financing
Definition and Examples
Sources fulfilling financial needs for more than 1 year but less than 5.
Sources include:
Loans from Banks: Medium-term loans (2-4 years) for fixed assets and expansions.
Loan from Financial Institutions: Government-established institutions that provide affordable long-term loans.
Public Deposit: Money received from public deposits or loans.
Short Term Financing
Definition and Purpose
Funds required for daily operational expenses, typically for less than one year.
Also known as Working Capital Finance.
Purposes include:
Purchasing raw materials.
Paying wages.
Covering utility charges (water, electricity).
Sources of Short Term Financing
Trade Credit: Credit allowed by suppliers for manufacturers or traders.
Short Term Bank Loans: Funds advanced by banks, repayable in a specified short term.
Factoring: Selling accounts receivable to third parties to meet liquidity needs.
Commercial Paper (CP): Short-term, unsecured promissory notes from companies with good credit ratings.
Modern Sources of Finance
Overview of Unconventional Sources
Startups and businesses are increasingly using unconventional funding sources.
Key sources include:
Angel Investment: Funding from experienced individuals in exchange for equity; often involve personal networks.
Venture Capital (VC): Investment in high-risk emerging companies for high returns, often in tech sectors.
Private Equity (PE): Investments in non-publicly traded companies or buyouts that lead to delisting.
Angel Investment
Provides needed capital for startups from seasoned investors.
Funding may be a one-time or ongoing injection.
Example: Sanjay Mehta has invested in startups like OYO Rooms and Fab Alley.
Venture Capital (VC)
Focused on seed and early-stage companies with growth potential.
Aimed at high returns from innovative firms, especially in tech.
Example: Food Panda was funded by Rocket Internet.
Private Equity (PE)
Involves investments in private companies or public company buyouts.
Funded by retail and institutional investors, focusing on new technologies.
Example: Justdial funded by Sequoia Capital and SAP Ventures.