Horti-Business Management (2+0)

Sourcing of capital for business

• There are two major forms of financing any business; equity financing and debt financing.
• Equity capital (ownership) may come from personal savings, from partnership or by selling stock in a corporation. Equity financing involves giving up ownership to the investors of the business. It also involves dividing of the business ownership among the various investors. That is instead of repaying an investor or one is giving money to the business, the investor now becomes an owner and receives money from business primarily through dividend or profit sharing system.
1. Common stock. This is the most widely used form of equity financing and provides the greatest potential return on investment for the investor. It is important to remember that if the firm does fail, all of the creditors, and investors would be repaid before the common stockholders are repaid.
2. Preferred stock. It provides a preference for stock holders during failure or bankruptcy. Preferred stockholders must be paid in full before other common stockholders are repaid. Because of this preferential treatment, the preferred stockholders receive smaller dividends or returns on investment than do common stockholders; therefore, convertible preferred stock may be used, allowing the investors to convert their preferred stock at any time in the company’s future.
3. Convertible debentures. This is a long-term debt that would be paid off by an investor, with the option of the investor to convert the debentures to common stock before being repaid.
4. Debt warranties are similar to convertible debentures but would allow the investor or creditor the option to purchase a specified stock at a specific set price. This option to purchase is available to the investor or creditor, even after the debt has been repaid but before the warranty has expired. This generally provides a longer time period for investment (ownership) for one providing debt financing to a corporation. That is, the debt warranty would allow someone loaning money to a business the opportunity to own part of the business even after the debt has been repaid until the time when the warranty expires.
• Both debentures and debt warranties are debts and, therefore, must be paid before either common stockholders or preferred stockholders are paid in case the business fails. All four of these opportunities are good opportunities to invest in business and provide potential ownership to investors who are interested in that specific business.
• Venture capital has become an increasing source of equity funds for new business ventures. Venture capital individuals or firms supply funds for a percentage ownership of the new business. This source of capital has been popular in business start –ups involving new technology.
• Source of debt capital are commercial banks, co-operative banks, mutual funds, vendors, equipment manufactures and distributors, factors, private investors, special type of finance lending institutions. Commercial banks in India include State Bank of India and its Associate Banks, all nationalized banks and private commercial banks. Many of the commercial banks have industries branches. They provide both fixed capital and working capital with over draft facility.
• Special financial institutions like
• Industrial Development Bank of India
• Tamil Nadu Industrial Investment Corporation
• Small Industries Development Bank of India
• Mutual Funds
• National Bank for Agricultural and Rural Development
• Co-operative banks
• Industrial Credit Investment and Investment Corporation of India
• National Agricultural Marketing, Federation of India
• Export – Import Bank (Exim bank)
• Vendors can be an important source of short – term credit for small business firms. Firms that sell inventories to a business usually will finance the purchase of these goods for short periods of time, usually 30 to 90 days.
• Factors are financial firms that finance accounts receivable for business firms. They may either purchase or discount accounts receivable. If they discount accounts receivable, they function exactly as the commercial bank. When factors purchase accounts receivable, they make an analysis of the receipt of the accounts and pay the business firm a percentage of the total amount.