Sources of Funds

Entrepreneurship Development

Lesson 12 : Financial Planning

Sources of Funds

  1. Shares capital: Means of raising long term funds. These shares are of 2 types.
    1. Preference shares – which carry the following preferential rights:
      • A preferential right in respect of a fixed dividend
      • A preferential right as to repayment of capital in the case of winding up of a company

      They get a share of the surplus profits also.

    2. Equity shares – they do not carry any preference rights. The rate of dividend is not fixed in their case and therefore they enjoy all the profits left out after paying a fixed rate of dividend on preference shares.

  2. Debentures: A debenture is a document issued by a company as an evidence of a debt due from the company with or without a charge on the assets of the company. It is a certificate issued by a company under its seal acknowledging a debt due to its holders. This is not a very popular method of raising long term funds. But it is cheaper since the rate of interest payable on it is lower than the dividend rate on preference share.

  3. Commercial banks: Provide short term credit to the business; through
    1. Loans: an advance made with or without security; on which interest is charged.
    2. Cash credits: It is an arrangement by which a banker allows its customer to borrow money upto a certain limit. Interest has to be paid by the customer only on the amount actually drawn at any time and not on the full amount of the credit allowed.
    3. Overdrafts: Customer is allowed to overdraw his account, if he requires temporary finance.
    4. Discounting of bills.

  4. Public Deposits: Most companies accept deposits for short periods from their member, directors and the general public (only upto 25%). From directors, members etc. -15% of its paid up capital.

  5. Ploughing back of trading profits: This is also known as ‘internal financing’ or ‘self- financing’.

  6. Specialized financial institutions:
    1. Industrial Finance Corporation of India – this provides long term financial assistance to large scale industries and not to enterprises organized on proprietary basis and small scale units. Loan period not exceeding 25 years.
    2. State Financial Corporation: Established in each state. Meet financial requirements of small scale and medium scale units. Provide loans upto a period of 20 years.
    3. Industrial Credit and Investment Corporation of India: Provide financial assistance to enterprises in private sector. Loans provided upto a period of 15 years.
    4. Industrial Development Bank of India: This coordinates the activities of other financial institutions and serves as an apex institution provides finances to industrial units and refinances other financial institutions.
    5. Unit trust of India: Provides financial assistance to companies by directly subscribing to their shares or debentures.
Index
Previous
Home
Next
Last modified: Tuesday, 31 July 2012, 10:02 AM