SOURCES OF FINANCE

SHORT TERM & LONG TERM

 Short term sources
• Commercial papers
• Factoring
• Intercorporate deposits
• Working Capital Loans
 Commercial Papers
• one of the non-bank sources of working
capital finance .
• a money market instrument.
• regulated by the directions of the Reserve
Bank of India.
• The secondary market is yet to develop.
 Issue of Commercial Paper
• Commercial Paper can be issued by a company
whose
(i) tangible net worth (paid-up capital plus free
reserves) is not less than Rs 4 crores
(ii) fund based working capital limits are not less
than Rs. 4 crores
(iii) Specified Credit Rating of P2 is obtained
from CRISIL, A2 from ICRA and PR2 from
CARE
(iv) Borrowal health is classified under health
code No. 1 and
(v) Current ratio is 1.33: 1.
• Usance :issued for a minimum period of
three months and maximum of one year
• Denomination: issued in denominations
of Rs. 5 lakhs. But the minimum lot of
investment is Rs 25 lakhs (face value) per
investor.
• Ceiling :should not exceed 75 per cent of
the company's fund based working capital
• Mode of Issue and Discount Rate:
should be in the form of usance
promissory note negotiable by
endorsement and delivery. It can be
issued at such discount to face value as
may be decided by the issuing company.
• Procedure for Issue:
issued only through the bankers who have
sanctioned working capital limits to the company
should submit the proposal in the form
prescribed by the RBI to the bank which
provides working capital along with the credit
rating of the company.
privately place the issue within two weeks by the
company or through the good offices of a
merchant banker.
 FACTORING
• the factoring agent buys up the receivable
from the seller.
• provides immediate finance to the seller in
consideration of assigning the receivable
to him.
• A factor makes the conversion of
receivables into cash possible.
• risk of the debt going bad is passed on to
the factor.
• Client concludes a credit sale with the customer.
• Client sells the customer’s account to the factor and notifies the
customer.
• Factor makes a part payment (advance) against the account
• purchased after adjusting for commission and interest on the
advance.
• Factor maintains the customer’s account and follows up for
payment.
• Customer remits the amount due to the factor.
• Factor makes the final payment to the client when the account is
collected or on a guaranteed payment date.
 FORMS OF FACTORING
• Recourse factoring
• Non-recourse factoring
 LONG-TERM SOURCES OF
FUND
• Shares
• Debentures
• Term loans
• Venture capital
• Lease financing
 Shares
• Equity shares
• Preference shares
• Primary market
• Secondary market
 Debentures
• Debentures are debt securities
• a document which either creates a debt or
acknowledges it
• issued under the Company's Common
Seal.
• Debentures holders have no right to vote
at the meetings of the companies.
 KINDS OF DEBENTURES

• Secured debentures
• Naked debentures
• Redeemable debentures
• Perpetual debentures
• Convertible debentures
 Term Loans
• Long term debt with a maturity of more
than one year.
• Obtained from banks & financial
institutions
• Mainly to finance company’s capital
expenditure
 Venture Capital
• Early stage financing of new & young
enterprises.
• Features:
• Equity participation
• Long term investment
• Participation in management
Stages in venture capital financing
• Early stage financing
• Expansion financing
• Acquisition/buyout financing growth
Process of venture capital financing
• Deal origination
• Screening
• Evaluation (due diligence)
• Risk analysis
• Deal structuring
• Post-investment activity
• Exit plan
 Method of venture financing
• Equity
• Conditional loan
• Income note
 Lease Financing
• Lease is a contract between a lessor,the
owner of the asset & a lessee,the user of
the asset.
• Lease rental
• Up-fronted leases
• Back ended leases
 Types of leases
• Operating lease
• Financial lease
• Sale & lease back
 Financial restructuring
• Debt equity swaps
• A transaction in which a corporation exchanges
existing bonds (debt) for newly issued stock
(equity). For example, XYZ company can in
essence cancel a portion of their debt and
transfer the equivalent balance to equity. A debt-
equity swap can help a company that is in
financial trouble by canceling some of its
outstanding debt.
 Mergers & acquisitions
• Two or more companies combine into one
company
• a merger happens when two firms, often
of about the same size, agree to go
forward as a single new company rather
than remain separately owned and
operated.
• Ex:Mittal Steel(25th June,2006) decided to
merge with Arcelor, with the new company
to be called Arcelor Mittal.
• In practice, however, actual mergers of
equals don't happen very often.
• one company will buy another and, as part
of the deal's terms, simply allow the
acquired firm to proclaim that the action is
a merger of equals,
 Forms of merger
• Horizontal merger
• Vertical Merger
• Conglomerate merger
 Acquisition
• When one company takes over another
and clearly established itself as the new
owner, the purchase is called an
acquisition.
• Ex: Tata-Corus acquisition
 Leverage buy outs
• Acquisition of a company in which the
acquisition is substantially financed
through debt.