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Project financing
This document discusses project financing and planning for small businesses. It addresses why financing plans are needed, determining funding requirements, and potential sources of capital. Short-term and long-term financing needs are examined. Factors that influence working capital requirements like the nature of business, operating cycles, and seasonal variations are also summarized. The document provides an overview of evaluating business ideas, conducting feasibility analyses, and selecting an appropriate business structure. Key steps in project planning like setting objectives, securing resources, and commercializing are highlighted at a high level.
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Project financing
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- 2. Why is aFinance plan needed???? How much needed? Sources ? How to utilize?
- 3. Small Business Finance-Features Creditworthiness: low (new)- can raise only against security of his assets Need for liquid Assets- labour intensive(Small Business) – need liquid cash Dependence on borrowing –funds (limited) Personal Management & Control –prefer retaining control over business (not interested in raising from other sources)
- 4. Finance needShorttermFinance Day today requirements - creditors, banks,customer advances, borrowings LongtermFinance For fixed assets and maintain minimum working capital - Term loan from banks, Subsidy from government
- 5. Why funds needed? Cost of fixed Capital Permanent assets – Land and Building, Plant and Machinery Cost of Current Assets Cash & bank balance, bills receivables ,work in progress, prepaid expenses Cost of Promotion Expenses connected with setting enterprise- legal fees, marketing surveys Cost of Setting up the Business All initial cost for setting up the business Nature of Business Manufacturing- Capital more Trading- less
- 6. Cost ofFinancing: Advertising, brokerage, printing, underwriting etc Cost of Intangible Assets Cost of goodwill, patents, copyrights (acquiring these assets from other firms) Production Technology Capital intensive more finance than labour intensive
- 7. Capital Requirement FixedCapital Working Capital
- 8. Fixed Capital Capitalneeded for long term production activities Investment in fixed assets Type of business (manufacturing/Trading) Size of Business (large/small) Techniques of production (capital/labour) Activities undertaken (purchase,sale-more) Raising fixed Capital at minimum cost And effective and efficient utilization
- 9. Sources of FixedCapital Equity Shares: Risk bearers Owners Limited liability Voting rights Dividend payment not obligatory Preference Shares: Enjoy dividend Steady return Redemeed Debentures: Raise funds from public Secured and fixed % int Convertible/partly convertible Term Loans 10 years and above Fixed rate of interest Retained Earning Surplus accumulated Reinvested No liability created Capital Subsidy Government provide subsides
- 10. Working Capital Amountof capital needed for day to day business activities Gross working capital =total CURRENT ASSETS which can be converted to cash Net working capital = CA-CL Working Capital divided into two: a)Permanent Working Capital b)Variable Working Capital
- 11. Permanent Working Capital Minimum amount of investment needed to make sure there is effective utilization of fixed facilities Minimum level of capital required by enterprise all the time Regular(minimum needed to ensure circulation of current assets from cash to inventory, inventory to receivables) Reserve Working Capital (excess amount over requirements to meet future contingencies)
- 12. Variable Working Capital Additional assets required at various times Seasonal Working Capital- capital needed to meet seasonal demand Special Working Capital- capital needed to meet special requirements like launching a new advertising campaign It is short period and cannot be used permanently
- 13. Determinants of WorkingCapital Nature of Business Trading & Financial firm –less investment in fixed assets but heavy investment in current assets Manufacturing- require both… but working capital is less than trading firms Operating Cycle: Stages through which cash gets converted Manufacturing- starts with purchase of raw materials and ends with sale Longer this cycle- more WC needed Scale of Operations: Larger the scale- more WC Smaller the scale –less WC
- 14. Credit Policy: Business(buying on credit and selling on cash/credit) –Less WC (buying on cash and selling on credit – More WC Seasonal Variation: Some business require stock which are seasonal in nature-so to block the stock (More WC needed) Fluctuations in Demand: Some firms have fluctuating demand, so to build up inventories Boom period- WC more Depression Period –WC less
- 15. Earning Capacity& Dividend Policy If Earning capacity is more- profit more – then contribute to WC If desirous dividend policy – then more WC • Fixed WC financed by long and medium term sources • Variable WC financed by short term sources repayable in a year
- 16. Promotion of aVenture SearchingforBusinessIdeas Market observation Consumer Survey Keeping Track of Developments Scrutinizing Project profiles Processing&SelectingBestidea Technical & Commercial Feasibility Collectingtherequired resourcesandsettingenterprise Cost Theory Earning Theory
- 17. Searching For businessIdeas Market Observation: Market surveys, Assessment can be made regarding supply and demand for products And hence decide which has more demand and is profitable Consumer Surveys: Tastes, preferences , likes ,dislikes can be understood Conduct test marketing to know about customer response Keep track of developments: Developments taking place in developed countries, visit trade fairs, exhibitions to better understand market trends, meet buyers, attitude of competitors, quality of products, meeting dealers etc
- 18. Scrutinizing ProjectProfiles: Government and private agencies provide profiles of various projects and industries – assistance can be taken for the same
- 19. Processing and Selectingthe best idea Technical Feasibility: To what extend it is possible to technically produce the product Technical aspects include whether technology is available Inputs available for technology? Service of experts can be considered Commercial Feasibility: To extend of profitability is considered Like demand, supply, expected sales, profit etc Sometimes products may be technically feasible but not commerically
- 20. Collecting Required Resourcesand setting enterprise Collect required resources to analyze and record market information For setting up enterprise he should a)Set objectives b)Develop relations c)Secure financial resources d)Acquire technological equipment and upgrade them e)Maintian good relation with authorities
- 21. Estimation of financialRequirements Cost Theory: Funds needed for promotion and setting up of enterprise also meeting current and fixed asset requirement Does not speak about earning potentials about enterprise Simple and convenient Earning Theory: Anticipated Profits/Return on Investment in industry *100
- 22. Selection of OwnershipForms Nature /Type of Business: Sole proprietorship –personal skill/attention Company- large scale management, huge funds Partnership- Meduim scale Financial Requirement: Small- Sole proprietorship Huge – Company Meduim/not very small- Partnership
- 23. Liability: Sole proprietorship/Partnership– unlimited Company- Limited Flexibility: Maximum Flexibility- Sole proprietorship Partnership- need approval from partners Company –Legal formalities before making changes Taxation: Sole trader/ partnership- tax increases as income increases (profit low) Company –flat rate (profits high)
- 24. Control: Full control–Sole trader Share ownership and control- partnership Control by BOD- company Survival or continuity Company- permanent survival Sole trader/Partnership –life of the sole trader and partner Business Secrets High secrecy- Sole trader Company –Open secrets
- 25. Government Rules& Regulations Sole trader- free Partnership – free to some extend Company- governed by rules, regulations
- 26. Problems faced byentrepreneurs Selection of technology: Technology of developed countries do not suit developing countries Sophiscated technology requires heavy investment not possible to adapt for developing countries Government Regulations: Follow rules, regulations, spend time , money and follow these formalities Resource Mobilization: Mobilizing resources to meet sufficient capital become difficult Trained Manpower: Non availability of technically qualified entrepreneurs
- 27. Opportunity analysis Entrepreneurshould be able to analyze opportunities Additive Better utilize of existing resources (no change in character of business) Complementary Introduce new ideas (change in existing structure) Breakthrough Opportunities Bring fundamental changes in both structure and character
- 28. Explore opportunitiesglobally a)Increase profitability & productivity b)Increase sales c)New product life cycle d)Lower cost e)Better Quality f)Better creativity Additive Less disturbance Less risk Complementary More risk Breakthrough Opportunities More risk
- 29. Steps in Selectionof a Business Idea New Product Ideas Idea Screening Concept Development &Testing -visualize the product -ideas may be contributed by scientists,designer ,rivals -detailed investigation of ideas -Drop ideas with less scope -develop ideas into concepts -Test ideas/concepts keeping customers in mind
- 30. Business Potential Analysis Product Development Test MarketingCommercialization Best concept should be put to detailed investigation to know its market potential, capital investment, return --viability and profitability is verified -give practical shape to the product -quality, production time, plant capacity, name, size, trade mark -place the product for sale in one or more areas -observe actual performance -understand consumer opinion -modify -actual introduction of product -channels of distribution are selected -advertising -sales promotion
- 31. Project Enterprise isbased on project Success and failure of enterprise depends on project “a whole complex of activities involved in using resources to gain benefits Project a)A scientifically involved course of action b)To achieve specific objectives c)Within a specific period
- 32. Project Planning Characteristics: a)Clear andspecific object b)Different from routine business c)Time constraint d)Financial Constraint e)Requires team work f)High risk & unceratiinity
- 33. Objectives of initiatinga project Maximize stakeholders wealth Increase production of goods or services Enlarge capacity of existing projects Increase rate of return Tangiably measurable and variable from time to time In tune with present or anticipated resources
- 34. Classification of Projects Quantifiable/Non- Quantifiable: Quantitative estimation of projects can be made Eg:Industrial development, power generation Estimation or assessment is not possible Eg:Education
- 35. Sectoral Projects Classificationof projects on the basis of sectors a)Agricultural & allied sector b)Irrigation & power c)Industry and Mining d)Social Service Sector e)Miscellaneous sector
- 36. Techno-Economic Projects: Classifiedinto 3: a)Factory Intensity Oriented Classification Intensity basis-Capital /Labour Large scale- Capital intensity Large no of human resource – Labour b)Causation Oriented Classification Demand based or raw material based projects Existence of demand – demand based Availability of raw materials –raw material based
- 37. Magnitude OrientedClassification: Size of business- small, medium, large based on project investment Financial Institution Classification: National and state level Institutions classify on the basis the purpose for which it is taken a)New projects b)Expansion Projects c)Diversification Projects d) Modernisation Projects
- 38. Miscellaneous Projects: Projectsclassified as under a)Service Projects b)Welfare Projects c)Educational Projects d)Research & Development Projects
- 39. Importance of Projects Catalyst agents of economic development Initiate the process of development ie production, employment Framework for future activities of organization Development of basic infrastructure and environment Socio-cultural development
- 40. Project Identification Identifymarket needs Take necessary steps to cater these needs Viability of project(cost, quantity, quality) Success of enterprise depends on right selection of project It is concerned with collection, compilation and analysis of economic data for locating opportunities for investment Ideas for projects may be from success stories of relatives, experience of others, skill of entrepreneur
- 41. Importance of ProjectIdentification Catalyst agents of economic development Initiate the process of development ie production, employment Framework for future activities of organization Development of basic infrastructure and environment Socio-cultural development
- 42. Selection of Product Identify based on market research (help of consultancy) Identify short term as well as long term aspects of product Who will buy Demand?? When ? Substitutes For how much? From where? Their expectation? Competitors ? Advertise? The level of education also affects the product selection Swot analysis- After this the most suitable idea is selected
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- 44. Project Formulation Stepby step investigation of resources and development of project idea Objective- Achieve Project objectives with adequate resources and minimum expenditure
- 45. Elements of Projectformulation Feasibility Analysis Techno Economic Analysis Project Design &NetworkAnalysis Input Analysis Financial Analysis
- 46. Feasibility Analysis Whetherit is desirable to invest funds in development of business idea If it is feasible proceed to next phase If not abandon it If information not available find new ways to choose
- 47. Techno Economic Analysis Estimate demand potential Selecting optimal technology This gives unique individuality to the project
- 48. Project Design &NetworkAnalysis Project design- Defines individual activities comprising project and their relationship Sequence of events in a project Detailed work plan with time allocation in the form of a network Makes sure work gets done on time and effective utilization of resources
- 49. Input Analysis Analyzethe inputs needed for operation of project Inputs may be resources- human /non-human Human –men , management Non-human –material, money, machinery
- 50. Financial Analysis Estimationof project costs, operating costs and fund requirements Better decision making Methods used: Cash flow, CVP analysis
- 51. Social Cost BenefitAnalysis Estimate of social costs and benefits are made Social profitability is analyzed Impact of project on society is analyzed
- 52. Project Appraisal Projectis presented such that the sponsoring body, external agencies decide whether to accept or reject the proposal
- 53. PROJECT PLANNING Bridgesthe gap between what we are at present and what we want to be over a period of time Project manager plays a very important role in project planning Objective: A basis for organizing Allocating responsibilities to project member Generate communication and coordination among members Helps better contribution in formulation of project Inculcate time consciousness Minimise uncertainity Improve efficiency Better controlling Regular flow of information regarding project
- 54. Scope of ProjectPlanning Project Work Planning Planning Manpower Requirements Planning Organizational Structure Financial Planning Planning efficient information system Identify project activities Spell schedule & Sequence to carry out activities Manpower needed to perform activities Decide on organizational structure for project execution Delegating responsibility Assessment of financial requirement Success depends on accuracy of information
- 55. Project Management Overallplanning and co-ordination of project from conception to completion Meeting all requirements and ensuring completion on time Within cost and meeting quality Steps: a)Project Definition & Scope b)Technical Design c)Financing d)Contracting e)Implementation f)Performance Monitoring
- 56. Project Definition Aproject One time Time limited Goal directed Requires commitment to varied skill and resources
- 57. Basis elements ofProject Management Resources Project Manager effectively manage resources assigned to project Resources include: Labour hours, managing labour contracts, managing right people with right skills in right quantity and right time Manage equipment( trucks, heavy equipments) Materials( computers, pipes, manuals
- 58. Time &schedule Time management a must A proper schedule to be made by breaking the project into small number of tasks and figure out what each task are, how long will it take ,order in which it has to be done Cost To complete it within budget Estimated cost,actual cost and its variablitiy Contingency cost
- 59. Project Management LifeCycle Need identification Initiate project Plan project Execute Plan Close out the Project Execute Plan
- 60. Need Identification Identify componentsof the project Identify both internally and externally Internal identification- during day to day management activities or facility audits External Identification –systematic audits conducted by reputable auditors or company The following aspects are to be considered a)Cost effectiveness b)Availability of technology c)Adaption to technology d)Other environmental and social cost benefits
- 61. Initiation Basic processesto get the project started There should be an agreement between those who will deliver the project, those who will use the project and those who will have stake in the project This improves profitability – involving all stakeholders Success depends on starting with complete and accurate information, management support
- 62. Planning It definesproject activities that will be performed , the products that will be produced, how activities can be accomplished and managed Defines tasks, time, resources, costs, provide framework for management and control Result of project planning- will help project team to achieve project goals and objectives
- 63. Executing Focus changesfrom planning to participating, observing and analyzing the work to be done The work activities in the project plan are executed resulting in completion of project deliverables and achievement of project objectives Ensuring that project plan is performed and completed efficiently
- 64. Controlling Comparing actualperformance with planned performance Taking corrective actions to get desired outcome
- 65. Closing Out Onceall project objectives are met Customer accepts the project or the end product
- 66. Technical Design Fora project to be taken up a sound technical feasibility study must be done comprising of Proposed technologies, process modification , equipment replacements Product/Technology – locally available, imported Commercial viability (rate of return, cash flow) Organizational and management plan for implementation like timetable, staff training
- 67. Financing Internal andExternal sources Internal Direct cash provision from company New share capital External Bank loan Leasing agreement Private finance initiative
- 68. Contracting Major portionof projects is execute through contracts Proper management of contracts is critical a)Competence and Capability of all contractors must be ensured- one weak link will affect b)Proper discipline must be enforced among contractors and suppliers c)Imposing Penalties for failure to meet obligation d)Helping Contractors and suppliers when In genuine problems
- 69. Implementation Major problems facedduring implementation are a)Poor Monitoring of Progress Less time is spend on follow up to see if all is going as per plan b)Not handling Risks: Immediate and focused attention is needed for risk or else the situation aggravates and has negative consequence on the project c)Poor Cost Management: Success of project manager= Cost Optimization done for project Managers do It in the beginning but fail to follow in the rest of stages
- 70. EXTERNAL ENVIRONMENTAL ANALYSIS Sum total of external factors within which the enterprise operates These factors affect the growth of entrepreneurship Positive as well as negative impact Economic Social Technical Compeititve
- 71. Economic Environment Comprisesof capital, labour, raw materials and market demand Capital: Adequate funds needed for bringing all factors of production It is with this factor all other factors are arranged Labour: Easy availability of right type of people Quality of labour rather than quantity Raw Materials: Basis for production Shortage of raw materials-affect production and entrepreneurial activity Market: No entrepreneur can survive without knowledge about market Purchasing power, price level, savings ,credit
- 72. Social Environment Thesocial setting in which people grow, beliefs, values ,norms Factors are a)Family Background- Joint family (more resources to invest & expand business) Father into business son may b)Friends, relatives, teachers c)Religion & castes –jains, marwadiz D)Social status
- 73. Technical Know How Analert entrepreneur must be technically updated They should highly educated and updated with proper training
- 74. Competitive Factors Accordingto Micheal Porter there are four forces for the analysis of industry and competitors. Risk of entry of Potential Competitors: Existing firms restrict entry of competitors as it may result in price cut/ offereing additional services Cost advantage: established firm enjoys better cost advantage Existing firms will have brand loyality Entry of foreign companies restricted Established firms have efficient distribution channels than new ones
- 75. Rivalry Amongstexisting firms To sell goods at lower prices/provide efficient services When demand is increasing- rivalry is lessened – increase sales Rivalry increases with decrease in demand Inorder to survive they need to bring in innovations – to fight the competitive structure in industry When demand is going down there are emotional and economical factors which force exit
- 76. Bargaining Strengthof Buyers Buyers can be a threat when they demand for better quality and more service Buyers are powerful when a)When there are few buyers and large suppliers b)Buyers purchase in bulk c)When suppliers depend on buyers d)Buyer can switch between suppliers
- 77. Bargaining Strengthof Suppliers Suppliers produce few substitutes and company has to depend on it If company is not substantial then lesser chance to reduce price and improve quality Company has no option but depend on suppliers cost will be high When company has to make goods on its own
- 78. Threat of Closesubstitutes Less substitutes then high prices And vice versa
- 79. Legal requirement forestablishment of a unit Partnership/ sole trader/ Company – should consider the size and risk before starting If sole trader no registration/formalities needed Apply for long term loans – with business plan and other evidence to bank or state level financial institutions Implement the project
- 80. Legal Formalities forSmall scale units Registration with director of industries: Registration not compulsory But for assistance from government need to register Two types of registration a)Provisional (before setting the unit) b)Permanent (after the unit commences production) Registering SSI Provide incentives and other benefits
- 81. Benefits of Registering Excise exemption Direct lax exemptions Priority sector lending Differential rate of interest
- 82. Objectives of registrationscheme To maintain a roll of small industries to which package of incentives and support to be targeted Provide certificate to enable units to avail benefits Serve the purpose of collection of statistics To create nodal centers at the centre, state and district level
- 83. Provisional Registration certificate Pre-operative period registration Helps in getting loans and other benefits Obtain facilities like accommodation, land NOCs,clearance from regulatory bodies
- 84. Permanent Registration Certificate Income tax and sales tax exemption Incentives and concession Availability of raw materials Renewed after 5 years
- 85. Procedure for registration Can apply for any item that doesn’t require industrial license Apply in prescribed application form No field enquiry is done …PRC issued Valid for 5 years if not able to start then reapply After unit commences permanent registration to be applied
- 86. Basis of evaluation All clearance to be obtained like drug licence ,Noc form pollution control board’ Unit doesnot violate any locational restrictions Value of plant and machinery is within limits Unit not owned and controlled by any other undertaking
- 87. De-registration It crossesinvestment limits It manufactures any item that requires license It doesn’t satisfy any other condition of being owned, controlled or being a subsidiary of any other undertaking
- 88. Cancelling Registration Remainedclosed for more than a year Fails to give true and full information Unit misutilised resources given to it
- 89. Setting up Unit Home –best place If somewhere else the negotiate on the purchase Organise proper construction of building Pay attention to interior design,utility connections like electricity,water etc Manpower, machinery installation Material procurement- inventory management
- 90. Filing the entrepreneursMemorandum To be filed with District Industries Centre in the jurisdiction where it is located Comply to all regulation in force like taxation, environmental etc SSI requires no licensing Environment & Pollution related clearance needed but for SSI units its simplified. Except for 17 critically polluting sectors all SSI can merely file application Quality Certification- ISO-9000
- 91. Loans Loans forspecific period- “term loans Long term and short term loans
- 92. Long term loans Given by financial institutions To meet financial requirements like acquiring fixed assets Even to replace or add equipment's Obtained from banks or FI Repayable after a year
- 93. Features of Longterm Loans Maturity: terms loans repayable within 5-15 years Loans by CBs – 3 to 5 years Currency: rupee loans as well as foreign currency loans (importing machinery Security : Primary Security- loans secured by assets Secondary Security- loans secured by current and future assets Restrictive Covenants –impose restrictive conditions on borrowers like information about operations, force promoters to dispose their shareholdings etc Interest and Principle Payment- within a period of 6 -10
- 94. Sources of LongTerm Loans Issue of shares Debentures FI Commercial Loans Public Deposits Retained Earnings
- 95. Issue of Share Equity Shares: Holder is the owner Control over working of company Paid dividend after preference shareholders Dividend depends on profit of company More risk They are paid off after all claims Cannot be redeemed/ but can buy back
- 96. Characteristics of EquityShares/Variable income security Maturity- cannot be redeemed, only at liquidation shareholders can ask for refund Claims- claim of residual income, no dividend fixed Claim on assets- residual claim on the assets of the company Voting Rights-voting rights and control over working of company(directors) Pre-emptive Right-increase subscribed capital it should be offered first to existing shareholders (right Issue) Limited Liability – Liability upto the value of shares
- 97. Advantages No fixedrate of dividend to be paid No charge over assets Need not repay before liquidation Real owners with voting rights If profit= dividend+ value appreciation Tax exemption Disadvantages Not safe Prosperous periods- higher dividends to be paid Shareholders can put obstacles to management Cost is high as the rate of return is generally higher If preemptive right not exercised, ownership may change hands
- 98. Retained Earnings Tradingprofits which is not distributed as dividends Retained for future expansion of business Sacrifice made by equity shareholders Also called internal equity
- 99. DisadvantagesAdvantages Ready availability Cheaper than external sources No loss of control of existing shareholders Positive feeling • Limited Finance High opportunity cost- sacrifice made by equity shareholders
- 100. Preference Share Capital Preference compared to other shares First preference for dividend Second preference for repayment of capital at the time of liquidation (after creditors) Fixed rate of dividend No voting rights No say in management
- 101. Features Maturity Irredeemable Pay themafter paying off creditors Redeemable – which are to be paid back Claims on Income Fixed dividend Cannot legally demand for dividends No extra earnings other than that fixed Dividends can be carried forward till it is paid
- 102. Claims onAssets: Superior to that of equity shareholders Control No voting rights No management control Hybrid form of security Some features of both equity and debt financing
- 103. Advantages Company's view Nolegal obligation to pay dividend Provide long term capital No liability to redeem preference shares during life time of the company No penalties for not redeeming Fixed rate of dividend Enhances credit worthiness of firm No control by holders Investors view Fixed dividend Preference Can vote of their interests are affected Disadvantages Companys view Interest rate more than debentures Frequent delays in payment affect creditworthiness Voting right Dividend is taxable Investors view At the mercy of management Lower dividend that equity shareholders No charge over assets Market price fluctuates
- 104. Debentures Debentures : Long termfinance through public borrowings Loan is raised through issue of debentures Debenture is the acknowledgment of debt Debenture holder- creditor of Company Fixed rate of interest Interest is a charge on the profit and loss of the company
- 105. Features Maturity Repaid aftera specific stipulated period Pay the principal amount if company doesn’t then holders can force winding up Irredeemable preference shares are also issued Claims on income Have to pay interest irrespective of earnings Claims on Assets Claim over the assets of the company First payment is to be made before equity shareholders and preference shareholders
- 106. Control No controlas they are not the owners No voting rights At liquidation if not repaid they may take control over the company Call feature Some have specific call feature where they can be called at a certain price before maturity date It should be called at a price more than the issue price
- 107. Advantages of Debentures To Company: Long term funds for company Lower interest rate that dividend paid Tax free No dilution of control as debenture holders do not have voting rights Fixed rate of interest irrespective of change in price levels To investors Stable source of income Safe Charge over assets Definite maturity period Interest of debenture holders protected by deed and SEBI
- 108. Disadvantages To investors novoting rights No control Not owners- cannot claim surplus assets Interest on debentures fully taxable Prices of debentures fluctuate with market To Company Legal obligation to pay Pay even if no profit Charge over assets High stamp duty Company with insufficient fixed assets, unstable earnings cant use this
- 109. Term Loans &Debentures Debentures are more flexible than term loans like maturity, interest rate Renegotiating is possible in case of term loans In case of debentures( many investors), term loans (few or one FI)
- 110. Equity Vs Debt Equity shareholders – owners/Voting rights Debenture holders- only rights if the company violates Claims secondary after creditors –Equity shareholders Equity shareholders are more risk takers Equity shares do not mature Interest paid to debenture holders-tax free Dividend paid to equity shareholders -taxable
- 111. Short Term Loans Obtained for a period less than a year To meet day to day working capital requirements Sources • Loans from commercial banks • Public deposits • Factoring • Discounting Bill of exchange • Advances from customers • Spontaneous Financing • Bridge Loans
- 112. Loans from CommercialBanks Cash credit • Right to borrow from bank from time to time upto a certain limit • Given on pledge of stock • Higher rate of interest on the amount withdrawn Overdraft o Current account holders o Withdraw upto a certain limit over and above the balance o Keeping view the creditworthiness
- 113. Demand Loans •Repayable in ayear • Either repayed in instalments or lumpsum • Loan is paid in lumpsum • Interest is charged on total amount of loan Purchasing and discounting of Bills
- 114. Public Deposits Solicitunsecured deposits from public to finance working capital requirements Maximum period is 6 months Long term and short term deposits For that it needs to disclose certain facts related to financial performance and position A deposit made by one company with another company for a period upto 6 months is called inter-corporate deposit
- 115. Factoring Assisting suppliersin the matter of financing and collection of receivables
- 116. Bridge Loan Ashort term loan that is taken until permanent financing is arranged Swing loan Usually for two – three weeks High interest rate 12-15% To satisfy working capital needs
- 117. Spontaneous Financing Advancefrom ones customer Eg: pay advance at the time of booking car- used for WC requirements No interest Cheapest form
- 118. Accrual Accounts ofOutstanding Expenses There is a time gap between income earned and actual income received And expense due and actual expense paid This outstanding wages, salary help the unit to meet it WC requirements
- 119. Features of Shortterm Financing Speed: Faster than long term (Loan agreement, financial strength examination) Flexibility: More flexible than long term Cost of Short term Debt: Interest rate lower
- 120. Disadvantages More risky: Interestrate fluctuates when compared long term (stable) If firm depends too much on short term then it becomes difficult to repay debt
- 121. Overrun Financing Theamount of capital expenditure above the original estimate to complete the project Actual cost of project exceeds budget Cost overrun/budget overrun A completion guarantee by the project sponsor to cover the cost overrun risk
- 122. Bridge Financing Methodof financing used to maintain liquidity while waiting for anticipated inflow of cash Eg:sell house payment to be received after 100 days He purchases house payment to be made after 30 days-Bridge Finance Two types- closed & Open bridging Closed:There is date of exit of bridge financing, and bridge financing to be repaid on that date, less risk for lender, low interest rate Open:high risk,no exact date for bridge finance exit
- 123. Venture Capital Aform of equity investment where the investor who gives money also gets partial ownership of the company (through shares) and some sort of control in the board Provided to little knwn, unregistered, high risky, private small business Also provide management advice and contribution to overall strategy Long term association of investor with entrepreneur Some venture funds are industry specific(focus certain industries only) Georgraphic focus(certain areas) Open ended /close ended schemes(with maturity)
- 124. Features Investments madeare in high tech areas Risky and chances of failure is high as technology used by such projects are new and unproven Returns might take longer periods Also provides management advice Provide strategic inputs inorder to reduce uncertainties Also helps entrepreneur market the product Investment made in equity shares Long term investments ranging from 3- 10 years Act like a partner in entrepreneurs business sharing gains and losses
- 125. Approaching FI forloans Formal application to be made Balance sheet & P& l for past 3 years Income tax assessment certificate Proof of possession of land/building
- 126.