External Sources of Finance

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External Sources of Finance:

External Sources of Finance Following are the long term sources of finance Shares Debentures Public Deposits Borrowing from bank

External Sources of Finance:

External Sources of Finance Share:- A share is a single unit of total capital of company Related terms 1 Face value(min. value of share decided by the promoters) 2 Market value (value which investors are ready to pay) 3 Dividend (return on share capital)

External Sources of Finance:

External Sources of Finance Types of shares 1 Equity Shares Features - Redemption - Transfer of shares - Claims on income - Right to have information - Claim on assets - Control - Pre-emptive right

External Sources of Finance:

External Sources of Finance Advantages To company No obligation regarding dividend Permanent capital Unsecured To shareholders Limited liability Personal properties are not at stake

External Sources of Finance:

External Sources of Finance Disadvantages Dilution of control Cost (raising of funds, investors expectations) No tax benefit.

Preferential Shares :

Preferential Shares These are the shares which enjoy preferential treatments Types Cumulative vs Non cumulative Participating vs Non Participating Convertible vs Non convertible Redeemable vs Non redeemable

Preferential Shares :

Preferential Shares Features Maturity Claims on assets & income Control(right to vote only in some specific cases) Advantages To the company Can increase profit of equity holders No voting rights Security is not mandatory

Preferential Shares :

Preferential Shares To shareholders Fixed rate of Dividend Enjoy preferential rights over equity holders Disadvantages No voting rights Due to new amendment , no issue of non redeemable shares

Debentures:

Debentures In simple words , the debenture means a document containing an acknowledgement of indebtedness issued by a company & giving an undertaking to repay the debt at a specified date or at the option of the company & in the mean time to pay the interest there-on at a fixed rate & at intervals stated in the debentures .

Types of Debentures:

Types of Debentures Secured vs Unsecured Registered vs Bearer Redeemable vs Non- Redeemable Convertible vs Non- convertible

Features of Debentures:

Features of Debentures Maturity Claims on Income Claims on Assets Control

Advantages of Debentures:

Advantages of Debentures To the Company The controlling position of the existing equity shareholders is not affected . Low cost Easy to raise during depression To the investors Fixed rate of return Security available for investment

Disadvantages of Debentures:

Disadvantages of Debentures Risk of interest , payment of principal on decided date. A company having less FAs , may find debentures as a wrong capital source .

Bank Loans:

Bank Loans The loans indicate liabilities accepted by the enterprise for satisfying the short term & long term requirements . Banks & financial institutions have the authority to grant loans.

Types of Bank Loans:

Types of Bank Loans Short Term loans :- Duration 1 year Overdrafts Bills Discounting Cash Credit Medium Term Loan :- Duration :- up to 5/6 years Long Term loans :- Duration :- more than 5 / 6 years

Bank Loans:

Bank Loans Features of Loans Maturity Purpose Security Repayment Flexibility Contractual in nature

Bank Loans:

Bank Loans Advantages of Loans To bank Secured Repayment of installment & interest at regular interval Bank can interfere in operations of business by taking legal action

Bank Loans:

Bank Loans Advantages of Loans To borrower Low cost No controlling rights Term loan introduces proper financial discipline in the borrower

Bank Loans:

Bank Loans Limitations of Loans Risky form of capital Restrictions :- regarding security , providing financial statements

Public Deposits:

Public Deposits This is a mode of collecting finance from public . Usually companies accept public deposits to suffice their working capital needs . Rules for acceptance No company shall accept any deposit which is repayable on demand. Minimum duration – 6 months ,Maximum duration – 36 months.

Public Deposits:

Public Deposits The maximum amount of deposits which a company may accept will be 25 % of the aggregate of paid up capital & reserves out of which not more than 10 % should be from a shareholder of non – private limited companies or should be guaranteed by any directors

Public Deposits:

Public Deposits When a company decides to raise money from public in the form of PD, it has to advertise the issue which must contain info. Of the company , its branches , subsidies, details of directors , summarized financial position (two audited B/Ss ) PD can be renewed through an application form Investors must get PD Receipt within a period of 8 days from accepting the money

Public Deposits:

Public Deposits Advantages To Investors High rate of return Maturity period is short Limitations To Company Limited funds can be obtained Limited maturity period

Public Deposits:

Public Deposits Limitations To Investors Interest charged does not enjoy tax exemption. Unsecured Purpose is not committed .

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