Finance is life blood of a business Finance is defined as the provision of money at the time when it is required Every business

s needs funds for two purposes -for its establishments (Fixed Capital) -to carry out its day-to-day operations (Working Capital).

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Sources from which business meets its financial requirements can be classified as follows:

Sources

According to Period: Long-term Medium-term Short-term

According to Owner ship: Owen Capital Borrowed Capital

According to source of generation: Internal Sources External Sources

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In another way of classifying sources of finance is the Mode of Financing Mode of Financing

Security Financing

Internal Financing

Loan Financing

Ownership Securities

Creditors ship Securities

Ordinary Shares

Preference Shares

No Par stock

Deferred Shares
Debentures

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Share is one of the units into which the share capital of company has been divided. According to Section 2 (46) of the companies Act 1956 a share is the share in the capital of the company includes stock except where a distinction between stock and share is expressed or implied. It is also known as ordinary shares or common shares, represent owners capital in a company real owners of the company, have voting right in the meetings of the company provide permanent capital to the company have a residual claim on the income of the company (variable income securities) have residual claim on company assets Pre-emptive Right Limited liability

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Preference Share: preference share are those which carry the following preferential rights over other classes of share: 1. A preferential right in respect of a fixed dividend. 2. A preferential right as to repayment of capital in the case of winding up of the company in priority to other classes shares

of

Features of Preference shares:

A fixed rate of dividend is payable These share have preference in the repayment of capital at the time liquidation of a company they do not have any voting right

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Preference shares

On the basis of Accumulation

Cumulative Non-Cumulative

On the basis of Redemption

Redeemable Non-Redeemable

On the basis of Participation

Participative Non-Participative

On the basis of Conversion

Convertible Non-Convertible

No par stock/shares: No par stock means share having no face value. The capital of company issuing such shares is divided into a number of specified share without any specific denomination
The value of a share can be determined by dividing the real net worth of the company with the total number of shares of the company. Such shares issued in certain countries like U.K., U.S.A and Canada. But in India no such shares can be issued as the companies Act., 1956.
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Deferred Shares: These shares were earlier issued to promoters or services rendered to the company. These shares are also known as founder shares.

These shares rank last so far as payment of dividend and return of capital is concerned.
According to Companies Act 1956 no public limited company or which is a subsidiary of a public company can issue deferred shares Sweat Equity Share: Equity shares issued by a company to its employees or directors at a discount or for consideration other than cash for providing know-how- or making available rights in the nature of intellectual property rights or value addition, by whatever name called.

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Debentures or Bonds: A debenture is a document under the companys seal which provides for the payment of a principal sum and interest thereon at regular intervals, which is usually secured by a fixed or floating charge on the companys property or undertaking and which acknowledges a loan to

the company.
Types of Debentures

Simple , Naked or Unsecured Secured or Mortgaged Debenture Bearer Debentures Registered Debentures Redeemable Debenture Irredeemable Debentures Convertible Debenture (Fully, or Partly)

Zero Coupon Bonds First Debentures Guaranteed Debentures (interest and capital repayment by third parties i.e., banks or Government) Collateral Debentures.

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Existing or a going concern, which needs finance for its further growth and expansion, can also generate finance through its internal sources viz; retained earnings or ploughing back of profits, capitalization of profits and depreciation
Ploughing back of profits: The process of retaining profits year after year and their utilization in the business is also known as ploughing back of profits.

Factors that influence the reinvestment of profit: oEarning Capacity oFuture Financial Requirements oDividend Policy oTaxation Policy

Advantages oA cushion to absorb the shock of economies (depression) oHelps on following stable dividend policy oEconomical method of financing oIncreases in the value shares oNo dilution of control

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It means the gradual decrease in the value of an asset due to ear and tear, use and passage of time. It is a capital cost of the asset allocated over the life of the asset. To the extent depreciation helps in effecting savings in the payment of tad and dividends, it is regarded as a source of fund. This is the third important mode of finance rising both short-term and long-term including medium-term loans Sources of short-term finance: Indigenous Bankers Trade Creditors Installment credit Advances Accounts payables Accrued Expenses Sources of short-term finance: Deffered Incomes (received in advance) Commercial Paper Commercial Banks Public Deposits Letter of Credit

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Industrial Finance Corporation of India (IFCI) Industrial Credit and Investment Corporation of India (ICICI) State Finance Corporation of India (SFC)

State Industrial Development Corporations (SIDCs)

Industrial Development Bank of India (IDBI) Industrial Reconstruction Bank of India (IRBI)

(finance to sick and closed industrial units)

Unit Trust of India (UTI) Small Industries Development Bank of India (SIDBI) Term Financing by Commercial Banks

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Venture Capital: Represent s financial investment in highly risky projects with the object of earning a high rate or return. Venture capital companies provide the necessary risk capital Seed Capital : At the time of financing a project, financial institutions always insist that the promoter should contributed a minimum amount called promoters contribution. But there are number of technically qualified entrepreneurs who lack financial capability. The IDBI opened a scheme to provide such funds

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Bridge Finance: There is usually a time gap between the date of sanctioning of a term loan and its disbursement by the financial institution to the borrowed firm. The same way time gap may thee between sanction of grant or subsidy and its actual release by the Govt. The same delay may occur in case of public issue. To avoid this delay firms may go for short-term loans for the delay period, such loans are called Bridge Finance

Lease Financing: Leasing is a arrangement that provides a firm with the use and control over assets without buying and owning the same. It is a form of renting assets. (Companies compares cost of buying and cost of leasing an asset)

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Pre-emptive Right: To safe guard the interest of equity share holders and enable them maintain their proportional ownership, section 81 of the companies Act 1956 provides that whenever a public limited company proposes to increase its subscribed capital by the allotment of further shares, after the expiry of two years from the formation of the company or the expiry of one year from the first allotment of shares in the company whichever is earlier, such shares must be offered to holders of existing equity shares in proportion, as nearly as circumstances admit, to the capital paid up on these shares. Shares so offered to existing share holders are Right Shares and their
Ploughing back of profits: is a technique of financial management under which all profits of company are not distributed amongst the shareholders as dividend, but a part of the profits is retained or reinvested in the company Commercial Paper: It represent unsecured promissory note issued by firms to rise short-term funds. It is important money market instrument in advanced countries like USA. In India the RBI introduced commercial paper in the Indian money market on the recommendations of Vaghul Committee.
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