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Sources

of

Funds

Presented by:

Anupam Harne (8116)

Prasun Kumar Khan (8161)

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Why would a Business needFinance?

New Project

Expansion

Diversification

Modernization

Merger

Acquisition

Leveraged Buy Out

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}

MergerTwo or more companies combine into one, agree to go

forward as a single new company rather than remain

separately owned and operated.

Ex: Arcelor-Mittal merger.

}Acquisition

When one company takes over another one and clearly

established itself as the new owner, the purchase is called an

Acquisition.

Ex: Tata-Corus acquisition

} Leveraged Buy Out

Acquisition of a company by another in which the acquisition

is substantially financed through debt.

Sources of Funds

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Factors affecting Selection of

Sources of Finance

}Companys financial strategy

} Leverage planned by the Company

} Financial Leverage

}Operating Leverage

} Financial conditions in the economy

} Risk profile of the Company & Industry}Aggressive profile

}Conservative profile

}Mixed profile

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Classification of Financing

} Based upon the duration

} Long-term Finance

}Medium-term Finance

} Short-term Finance

} Based upon the source

} Internal Financing

} External Financing

Sources of Funds

Picture ofMoney Pot

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Internal Financing

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Sources of Funds

External Financing

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Short-term Financing

Short-termFinancing

Bank Loans

Trade Credit

BankOverdraft

Hire-Purchase/

Leasing

Factoring

CommercialPapers

Sources of Funds

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EQUITY FINANCE DIAGRAMCAPITALNEEDS

TIME

Seed Start-up Early Growth Sustained Growth

High Risk

Low Risk

Friends,

Family &

Fools

Business Angels

Formal VentureCapital

IPO

Growth

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Internal Financing} Sales/Revenue:

Generating cash by increasing Sales to customers

} Retained Earnings: Whole or a part of Profit earned is reinvested in the

business.

} Sale of Assets:

Disposal (sale) of any surplus assets no longer

needed

Assets sold and then leased back to free up heavy

amount of capital in short term

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Internal Financing}Working Capital Management:

Reductions in amount of stock held by business

Money loaned from trade suppliers by extended

credit

Reducing the credit period given to Debtors and

recollecting funds from them.

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Equity}Ordinary Shares (Equities):

Ordinary shareholders have voting rights

Dividend can vary

Last to be paid back in event of collapse Share price varies with trade on stock exchange

} Preference Shares:

Paid before ordinary shareholders

Fixed rate of return

Cumulative preference shareholders have right to

dividend carried over to next year in event of non-

payment

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}New Share Issues:

arranged by Merchant or Investment banks

} Rights Issue Existing shareholders given right to buy new shares

at discounted rate

} Bonus or Scrip Issue

Change to the Share Structure

Increases number of shares and reduces value

Market Capitalisation stays the same

Equity

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Debentures

}Debentures are Debt securities

}Debentures holders have no right to voteat the Board meetings of the companies.

} Right to be paid back prior to Equity

holders in case of company being wound

up

Sources of Funds

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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

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Process of venture capitalfinancing

} Deal origination

} Screening

} Evaluation (due diligence)

} Risk analysis

} Deal structuring

} Post-investment activity

} Exit plan

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Commercial Papers (CP)

} one of the non-bank sources of working capital

finance

} a Money Market instrument.

} regulated by the directions of the Reserve Bank of

India.

} Issued for a minimum period of 3 months and

maximum of 1 year

} Issued in denominations of ` 5 lakhs. But the

minimum lot of investment is ` 25 lakhs per investor.

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Bank Overdraft

} Easy to get

} More Flexibility

} Expensive mode of Finance

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Factoring

} A factor buys up the receivable from the seller.

} provides immediate finance to the seller in

consideration of assigning the receivable to him.

} The factor makes the conversion of receivables

into cash possible.

} Risk of the debt going bad is passed on to the

factor.

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Grants

} Specific Conditions

Location

Size

Sector of industry

} Rigid conditions across the board

} Usually relatively small amounts

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Business Angels} Business Angel = private investor who might invest

their own money in your business.

} Angel Network = organisation that links suitable

businesses to its membership of

Angel investors

} High Capital Returns for risks involved

} Often retired entrepreneurs, who are always looking

for new investment opportunities to increase their own

wealth

Sources of Funds

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Long Term FinancingSource

Equity

Ordinary Shares

Preference Shares

Bank Loans

Debentures

Hire-Purchase

Leasing

Use

Fixed Asset

Capital Expenditure

Land

Building

Plant

Equipment

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Short Term Financing

Source

Bank Loans

Bank Overdrafts

Trade Credit

Factoring

Use

Working Capital

Debtors

Stocks

Sources of Funds