Source of finance for business

Source of finance for business

Long term: more than 3 years
Mediam term:1-3 years
Short Term:up to 1 year

Source of finance for business

Long term(> 3 years)
Issues of shares
Issues of debentures
Loans from special industrial financial institution
Ploughing back earning
Medium Term(1- up to 3 years)
Preference shares
Debentures
Public deposits
Bank loan
Loans from special industrial financial institution

 Short term(up to 1 year)

Trade credit
Bank credit
Installments
Customers advances

Shares
Shares:a part or portion of a larger amount which is divided
among a number of people, or to which a number of people
contribute.
Preference Shares
Equity Shares
Deffered Shares

Preference share
a share which entitles the holder to a fixed dividend, whose
payment takes priority over that of ordinary share dividends.
preferred shares usually do not carry the same voting rights as
common shares.
they do have priority when it comes to dividends
and bankruptcy.
And like common shares, preferred shares can be bought and
sold through a broker.

Equity Shares
Equity shares were earlier known as ordinary shares.
The holders of these shares are the real owners of the
company.
They have a voting right in the meetings of holders of the
company. They have a control over the working of the
company. Equity shareholders are paid dividend after paying it
to the preference shareholders.
The rate of dividend on these shares depends upon the profits
of the company. They may be paid a higher rate of dividend or
they may not get anything.
These shareholders take more risk as compared to preference
shareholders.

Features of equity Shares

Equity share capital remains permanently with the company.

It is returned only when the company is wound up.
Equity shareholders have voting rights and elect the
management of the company.
The rate of dividend on equity capital depends upon the
availability of surplus funds. There is no fixed rate of dividend
on equity capital.

Deferred Shares
These shares were earlier issued to Promoters or Founders for
services rendered to the company.
These shares were known as Founders Shares because they
were normally issued to founders.
These shares rank last so far as payment of dividend and
return of capital is concerned.
Preference shares and equity shares have priority as to
payment of dividend.

Debentures
If a company needs funds for extension and development
purpose without increasing its share capital, it can borrow
from the general public by issuing certificates for a fixed
period of time and at a fixed rate of interest. Such a loan
certificate is called a debenture.
Debenture is issued under the common seal of the company
acknowledging the receipt of money.

Shares

Debentures

Part of Capital of the company

Part of loan of the company

Posses voting rights

Do not posses voting rights

Have to bear the losses & also take

part in profit

Get interest on their money

irrespective of losses or profits

Shareholders exercise control over

management

No control over management

Risk in investment

No risk in investment. Repayment is

guaranteed

The value of share is generally small

The value of debenture is generally

high

Shareholders get share in profit

No share from profit. They get fixed

rate of interest irrespective of loss or
profit.

Public Deposits
A company can accept deposits from the public to finance
its medium- and short-term requirements of funds. This
source has become very popular off late because
companies offer higher interest than the interest offered
by banks.
1. Total public deposits cannot exceed 25 per cent of the
paid up capital and free reserves of the company.
2. It is an uncertain source of financing.
3. There are legal restrictions on the acceptance and renewal
of public deposits.

Ploughing Back of profit

The Ploughing Back of Profits is a management policy under
which all profits are not distributed amongst the shareholders,
but a part of the profit is Ploughed back or retained in the
company.
These retained earnings are utilized in future for financing
modernization and expansion programmes and for meeting the
fixed or working capital needs of the company.
Since it means dependence on internal sources for meeting the
financial needs of the company.
It is also called Internal Financing or Self Financing.

Loan from financial institutions

Industrial Finance Corporation of India(I.F.C.I), is an

Indian government owned development bank to cater to the
long-term finance needs of the industrial sector.
Established in 1st July 1948 wit a object making long term &
medium term credit.
Provide loans up[to 25 years
Provide loan for only fixed capital like purchase of land for
factory site,construction of factory building

State Financial corporation of India(S.F.C)

Established in 1951
Grant loans to the medium or small scale industries.
It grants loan and advances for a period of not exceeding 20
years
18 SFCs in country
Industrial Development Bank of India(I.D.B.I)
Established in 1964
Owned by RBI
Provides financial assistant to the industries in the form of
loans, shares & bonds
Unit Trust of India(U.T.I)

 Organization: It is a group of people working together to

achieve a common goal.
It is grouping of activities and putting under different
departments according to their functions.
It brings men and material resources together for fulfilling the
goals of enterprise.

Business
An organization or economic system where goods and
services are exchanged for one another or for money.
Every business requires some form of investment and
enough customers to whom its output can be sold on
a consistent basis in order to make a profit.

Types of
Business

Sole
Proprietorship
/Individual
Ownership

Partnership

Private
Limited
Company

Joint Stock
Company

Co-operative
Enterprises

Public
Limited
Company

Public
Enterprises

Sole proprietorship/Individual ownership

Simplest and oldest form of business enterprise.
Individual entrepreneur supplies the entire capital, employs
labour and machines.
Solely responsible for good & bad result of working
Responsible for decision making, profit & loss, own managed,
controlled by only single man
Applications
Small scale business
Suitable where Less risk
In local market

Advantages
Simplest form of business
Least legal complications
Quick decision
Flexible business
Minimum wastage
Quality product
Disadvantages
Limited capital
Limited skill
High risk

Partnership
2 or more persons come together and start a business with their own
funds, the parties agree to share the profits as well as bear the losses
in the agreed proportion.
Advantages:
Larger financial resource compared to sole proprietorship
Greater personal contacts of the partners gives more customer base
& benefits.
Less expenditure per partner
Loss will be divided
Disadvantages
It get dissolved in case of retirement or death of partner
Short duration: Selfish attitude, blames

Joint Stock Company

It is superior than sole proprietorship & partnership
Capital is contributed by a large number of persons in the form
of shares of different values.
The proportion of capital to which each member is entitled is
his share and every member holding such share is called
shareholders and the capital of the company is known as share
capital.
The Companies Act 1956 defines a joint stock company as an
artificial person created by law, having separate legal entity
from its owner with perpetual succession and a common seal.
Private Limited Company
Public Limited Company

1. Artificial Person : A Joint Stock Company is an artificial person as it

does not possess any physical attributes of a natural person and it is
created by law. Thus it has a legal entity separate from its members.
2. Separate legal Entity : Being an artificial person a company has its
own legal entity separate from its members. It can own assets or property,
enter into contracts, sue or can be sued by anyone in the court of law. Its
shareholders can not be held liable for any conduct of the company.
3. Perpetual Existence : A company once formed continues to exist as
long as it is fulfilling all the conditions prescribed by the law. Its existence
is not affected by the death, insolvency or retirement of its members.
4. Common Seal : Being an artificial person a joint stock company
cannot sign any documents thus this common seal is the companys
representative while dealing with the outsiders. Any document having
common seal and the signature of the officer is binding on the company

Points

Private ltd.
Company

Minimum Paid-up
Capital

1 Lakh

Public ltd.
Company
5 Lakh

2
Private Limited
company At least 7
Minimum number
of members

Maximum number
of members

restricted to 50

No restriction for
upper limit

Transeferability of
shares

through its Articles of

Association

No restriction

Issue of Prospectus cannot issue

Prospectus

free to invite public

for subscription

Number of
Directors

At least 3

Government
Control

Not require to submit

balance sheet &
audited papers to
Govt.

require to submit
balance sheet &
audited papers to
Govt.

Co-operative society
Persons irrespective of caste, creed & religion, voluntarily
associate together as human beings.
It is based on the democratic principles & functions for the
public at large. It protects the interest of consumers & small
producers also.
Features
Voluntary organization
Open membership
Common purpose
Democratic management
Not profit oriented

Types of co-operative Society

Producers co-operative society
Consumers co-operative society
Housing co-operative society
Credit co-operative society
co-operative Farming society
Advantages
Easy to form co-operative society
Co-operative enterprise is useful to a common man
Profits are equally shared
Middlemans profit is eliminated since the purchase is directly
from producer.
Management is democratic.1 member ,1 vote principle is
applicable.

 Disadvantage
Not suitable for industries where a huge capital investment is
required.
Limited financial resources, services of highly qualified
persons cant be utilized
Sometime management is inexperienced &may incur losses
Person holding positions of power may take undue advantage
Conflicts among the members as they have equal rights &
equal investments.

Public sector Enterprise

Also called State ownership
Works for the benefit of the society at large state
ownership served as means to remove monopolistic
tendencies
Fields where lack of capital to start the business
Profit made by these goes to Govt.
Government department
Public corporations
Government company

 Government department:

Government monopoly
Financed out of govt. budget
Rules & regulations of Govt. applicable
Direct control of concerned ministry
Employees are treated as govt. servants.
Railways ,ports, defense

Public corporations

A body created by a law passed in the parliament.

Parliament controls its policies
Never work only for making profits
LIC, Indian airlines corporation

Government company

Govt.department takes initiative & establish company under company law.

Companies partially or completely owned by the govt.
Hindustan machine tools, Bharat heavy electrical

Public sector

Private sector

Service to the country is the main Profit is the main motive. It

motive .It benefits all
benefits only owners.
owned and managed by the Govt. Owned & managed by an
individual or group of individuals
Large amount of capital can be
available

Large amount of capital may not

be available

Monopoly concern hence less

competition

Face tough competition in the

market

Raise money from large amount

of capital can be available

Issuing shares and debentures or

by taking loan

Benefits :Job security, Retirement

benefits, Allowances, Perquisites
etc.

Benefits:Good salary package,

Competitive environment,
Incentives etc.

promotion Base :Seniority

Job stability: Yes

Merit
No

Police, Army, Mining, Health,

Manufacturing, Electricity,
Education, Transport,
Telecommunication, Agriculture,

Finance, Information Technology,

Mining, Transport, Education,
Telecommunication,
Manufacturing, Banking,

Policies and Incentives for small business

Micro, Small and Medium Enterprises:
The Ministry of Micro, Small and Medium
Enterprises is the nodal Ministry for formulation of
policies, programmes and schemes, their implementation
and related co-ordination, for the promotion and
development of small scale industries in India.
The role of the Ministry is to assist the States in their
efforts for the growth of the small scale sector, by
enhancing their competitiveness in an increasingly
liberalized economy. It is assisted by an attached office and
two public sector enterprise

 Micro, Small and Medium Enterprises Development

Organisation (MSME-DO)
It is the apex body for assisting the Government in
formulating, coordinating, implementing and monitoring
policies and programmes for micro, small and medium
enterprises (MSMEs) in the country.
MSME-DO provides a comprehensive range of common
facilities, technology support services, marketing
assistance, entrepreneurial development support, etc.

 National Small Industries Corporation Ltd

(NSIC) : was established by the Government with a view to
promoting, aiding and fostering the growth of micro,
small and medium enterprises in the country, with a
focus on commercial aspect of their operations.
It implements several schemes to help the MSMEs in
the areas of raw material procurement, product
marketing, credit rating, acquisition of technologies,
adoption of improved management practices, etc.

 Khadi and Village Industries Commission (KVIC)

established under the Khadi and Village Industries
Commission Act, 1956, as a statutory organisation engaged in
promotion and development of khadi and village industries for
providing employment opportunities in the rural areas.

 Coir Board : It is a statutory body, established under the Coir Industry Act,
1953, for the promotion and development of coir industry in
India as well as for uplifting the living conditions of the
workers engaged in this industry.

Investment in plant and machinery/ equipment (excluding

land and building)
Manufacturing
Enterprises

Service Enterprises

Micro

Up toRs.25 lakh

Up toRs.10 lakh

Small

More thanRs.25 lakh

and up toRs.5 crore

More thanRs.2 crore

and up toRs.5 crore

Medium

More thanRs.5 crore More thanRs.2 crore

and up toRs.10 crore and up toRs.5 crore

Tax Holiday Scheme

Composite Loan Scheme
Industrial Estate Scheme
Scheme for International Cooperation
Scheme of Surveys, Studies and Policy Research
Scheme of Fund for Regeneration of Traditional Industries
(SFURTI)
Scheme of Product Development, Design Intervention and
Packaging (PRODIP)
Scheme of Khadi Karigar Janashree Bima Yojana for Khadi Artisans
Scheme of Interest Subsidy Eligibility Certification (ISEC)

Credit Linked Capital Subsidy Scheme for Technology Upgradation

Credit Guarantee Fund Scheme for Small Industries
ISO 9000/ISO 14001 Certification Reimbursement Scheme
Scheme for reimbursement of fees to adopt barcoding
Integrated Infrastructure Development (IID Scheme)
Scheme for setting up of Mini Tool Rooms
Scheme for setting up of testing centres
Scheme for Market Development Assistance (MDA) for SSI exporters
Assistance for Strengthening of Training Infrastructure of existing and
new Entrepreneurship Development Institutions
Scheme of Micro Finance Programme

Bill Financing
Working Capital Finance
Export Development Finance
Equipment Leasing Scheme
Raw Materials Procurement Support
Marketing Assistance Programme and Exports Assistance;
Stores Purchase Programme
Single Point Registration Scheme and other services.