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.