SOURCES OF LONG TERM FINANCE

SOURCES OF LONG TERM FINANCE : 

SOURCES OF LONG TERM FINANCE

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Finance is the life blood of a business Sources of finance:- Short term sources   Long term sources

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Purpose of long term finance:- To finance fixed assets To finance the permanent part of working capital To finance the growth and expansion of a business

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Factors determining long term sources of finance:- Nature of business Nature of goods produced Technology used

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EQUITY CAPITAL TERMS: Authorized, Issued, Subscribed & Paid- up Capital. Par/ face Value, Issue Price, Book Value, Market Value.

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Rights Of Equity Share Holders: Right to Income Right to Control Pre – emptive Right Right in Liquidation

EQUITY CAPITAL : 

EQUITY CAPITAL

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PREFERENCE CAPITAL Hybrid form of Financing Equity Features: -out of distributable profits -dividends not tax deductible -Priority over Equity shares in case of bankruptcy Debenture features: -dividend rate is fixed -capital is redeemable -normally no right to vote

PREFERENCE CAPITAL : 

PREFERENCE CAPITAL

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INTERNAL ACCRUALS Retained Earnings Depreciation

INTERNAL ACCRUALS : 

INTERNAL ACCRUALS

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TERM LOANS Maturities Security Provided by Foreign Institutes/ Bank Repayment schedule Restrictive Covenants Convertibility

Term Loan Contd… : 

Term Loan Contd…

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DEBENTURES Interest Security Maturity & Redemption Options Convertibility

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Few types of Debenture Non – convertible debentures Fully convertible debentures Partly – convertible debentures

Debentures Contd… : 

Debentures Contd…

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Leasing Hire Purchase Asset Securitization Government Subsidies Lottery funding Selling asset Convertible bonds eg:British Airways has announced that it is to raise £300m of new funding via a convertible bond issue, as part of a £600m refinancing. Other Important Sources of financing

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Foreign Collaborators International Financial Institutions: Non-Resident Indians Foreign Sources

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Comparison of Various sources of Long – term Financing

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BENEFITS OF LONG TERM FINANCING VIDEO

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Raising Long Term Finance Initial Public offering Right Issue Private Placement Preferential Allotment Obtaining a Term Loan Venture Capital

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Initial Public Offering Decision to go Public Benefits Cost Eligibility Book Building process

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Right Issue Issue of capital to existing shareholders Offer made on pro rata basis Right shares are tradable, may be sold in open market. Comparison with Public issue: familiar investors, hence likely to be more successful Less floatation costs Lower pricing to benefit shareholders

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Private Placement Sale of securities directly to wholesale investors like FIs, banks, MFs, FIIs, PE funds etc.(QIP’s) Called private placement in equity/equity related instruments, in unlisted companies and in all cases of debt Called preferential allotment in case of unlisted companies for equity/equity related instruments Different from reservations made for such QIBs out of a public issue Subject to SEBI regulations on pricing, lock in period, open offer to be made to public QIB placement guidelines recently issued by SEBI for compliance and disclosures

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Obtaining a term loan Submission of loan application Initial processing of loan application Project Appraisal Issue of Letter of Sanction Acceptance of terms and conditions by the borrowing unit Execution of loan agreement Disbursement of loan Creation of security Monitoring

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Venture Capital Equity Participation Long term investment Participation in management

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Process of Venture Capital Financing

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CASE STUDIES: 1) A large plc is planning on moving a major part of its production facility to Cornwall. It has identified a site near a former chalk pit that is now not used. The estimated cost of the facility is £4.5 million.

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2) A medium-sized engineering firm with an annual return of over £ 2.5 million has decided to install a new piece of machinery to help improve its productivity. The equipment needs to be housed in anew building to be construed on the site. The forecast of the building is £ 150,000 and the equipment £400,000

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Conclusion During the research of this assignment we have concluded that many type of finance can be used at one particular time. Depending on the type of company and they should try to get the best possible finance deal to save the borrower on the risk of borrowing high amount and also to pay high amount on the interest rate.

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Business situations VIDEO

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