Sources Of Finance For A Public Limited Company Finance Essay

Sources Of Finance For A Public Limited Comp any(prenominal) Finance spatevasFinance is the basic ingredient of a assembly line. Insufficiency or absence seizure of property brook pose a threat for a cable. Without exchange a profession is unable to survive. Various tooth roots of pay military service to execute the needs of wages, advertising, expansion, payment of wagers etc.(Pride et.al, 2009). Different etymons of pay ar used depending upon their adulthood period. Each source has its advantages and disadvantages.Sources of financeThe sources of finance argon broad classified advertisement into the following massive border Finance metier boundary financeShort enclosure financeLong Term Sources of FinanceLong experimental condition sources of finance atomic number 18 those methods that ar adopted to provide finance for a long period of time. This period of time must be of whizz year and above. Long line sources argon for the most part complex and at omic number 18 usually adopted to fund activities comparable going for acquisitions, cross modality extensions, or buying up of new premises etc. utilisation of long term pay includes a 40 year mortgage or a 10 year treasury none. The sources of long term finance argonDebenturesDebentures argon the long term lends putd from earthly concern by a Public peculiar(a) company. These unsecured bonds are usually ranged from 0.01$ to carbon$ with varied interest regulates. Debentures are floated with certain term and conditions and are generally secured against the assets of a company (Chakraborty, 2004).Advantages of debenturesDebentures are a well suited expressive style of long term fiscal backing as the interest collectible on debentures is made before taxation.An other(a) advantage of debenture is that they are payable in time when the company does not produce emolument.Issue make up of debenture is low as compared to that of p adjoinence with child(p) and equity.D isadvantages of debenturesAs mentioned above, certain court and conditions are set out for debentures. Failure to meet those conditions, kindred interest and principal repayment requirement, keep result in not and monetary and social humiliation but can also raceway to bankruptcy.Debentures are square offd by the inflation consec ranks. If, by chance the inflation rate significantly drops down, then the material hail of the debt will become loftyer(prenominal) than what was initially set (Chandra, 2008).Convertible debenturesConvertible debentures offer the advantage of wide awake conversion of debt into equity. Convertible debentures are equal to the normal debentures in impairment of interest rates itemation and the principal payment, except that in moneyable debentures the buyer has the option of converting them into companys issuing share at a pre indomitable ratio.Convertible debentures are used by the companies to attract investors. Like the Essar steel, Ind ia issued translatable debentures coupled with warranty and loyal coupons as well as optionally fully convertible debentures to attract investors (Nidheesh, 2009).Advantages of convertible debenturesConvertible debentures are amicable for the issuing company as they offer low interest payments as compared to the traditional debt.For investors they offer a secure means of investment by dint of participation in the storehouse options and guaranteed coupon payments. at that place will be no capital gains tax for the holders of convertible debenture.Disadvantages of convertible debenturesIn possibility of bankruptcy, the debenture holder has a low priority claim on the companys asset as compares to the straight debt holders.The Valuation techniques for convertible debentures are a bit tricky and may require additional scrutiny (Hanif, 2001) coarse Stock general variant is a long term security measures that is issued to the owners of the company.Advantages of common stockCommon s tock offer some(prenominal) advantages.Common stocks are liquid i.e. they can be easily and readily bought and sold.The risk associated with common stock is very less as it is tho limited to the initial cash investment made.They are labeled to be high returners as compared to the other sources of investment.Disadvantages of common stockThe owners of common stock are last to be paid in the business after payments to employees, providers, creditors etc.The stock termss are usually unstable, that is they rise and fall quickly. So the investors are required to be vigilant in this regard.Preference sharesPreference shares refer to those shares that offer a touch on percentage of dividends that is paid in taste perception to the common shares to the stock holders.Advantages of druthers sharesThere advantages areIn preference shares the company is not forced to pay the dividends in the period when the welfare are poor.Preferred shareholders receive their payments first as compared to the common stock holders in event of bankruptcy.Disadvantages of preference sharesThey are riskier, as unlike other instruments, they are not secured against the assets of the company.The interest yield on preference stock is low as compared to the loan stockIn discipline of non-payment the favourite(a) stock holders, unlike debenture holders cannot call for a receiver for the claims (Carter et.al, 1997). oweA mortgage is a long term source of finance that is given by the borrower to the lender in exchange for the security of the real estate property. One can choose between a indomitable rate and adjustable rate mortgage depending upon ones risk bearing capacity, financial health and other requirements.Advantages of mortgageThe mortgage financing makes the borrowing pliant and affordable as it provides will power of real estate along with the formulation of financial aid.The interest rate on mortgage is tax free.The fixed schedule of mortgage payments allows you to compute r program up your cash flux and plan your needs and requirements accordingly.Disadvantages of mortgageThe neglectfulness risk is high in theme of mortgage.The mortgage terms and conditions requires for collateral to be penned as security. The lender has a correct to claim on the security in discipline of default payments.Finance Strategy Finance simplified for you brass grants/loansGovernment grants are of great assistance to the entrepreneurs in terms of providing the financial hold up. umteen of the government organizations are able enough to finance the young entrepreneurs to help them develop the right strategy for their business. The government organizations grant is not only limited to the strategic thinking phase, they also help the entrepreneurs in putting the plan to reality and also supporting the stat up costs (Gruber, 2009).Advantages of Government grantsThe government grants are easily and readily available for a business idea. Although a lengthy application proce ss is tough, yet the process is overmuch quicker than the other lenders. Like SBA (Small cable Association) approves a loan in 3-5 business days.The interest rate is lower for government grants especially in case of student loans.Disadvantages of Government grantsThe element of bureaucracy is usually involved to approach for the grantsThe government organization giving the gold, try to exert influence on the business management.The grantee is subjected to tougher terms and conditions in order to be eligible fot the grant.Retained ProfitRetained astound frontwards involves allocation of profit from an existing business to be reinvested in to the same business for the excogitation of financing. This money can be used to buy new equipment, machinery, painful material and other such reference of investments.Advantages of well-kept profitThis oddball of self financing helps the company to withstand any contingency requirements and uncertainties or even a calamity.The cost of r aising finance from outside source is saved through the retained profit move.There are no lengthy legal formalities involved in this type of financing.Disadvantages of retained profitSome companies falsely use the retained profit as a means of manipulating the value of shares and dividends.Improper use of retained profit in risky ad makes may result in a loss.(Rajni and Hiro, 2008)Medium term sources of financeMedium term financing or average financing is done for a period intermediate between 1 to 10 years. Medium term financing is generally done for the aspire of maintenance or up gradation of the business like devising values in the plant, buying up of raw material, assets and equipment. The sources of medium term finance areLoansLoans are a means of providing long term financing for activities such as buying of fixed assets like plant and equipment, backing up of working capital and or covering losses.Advantages of loansThrough loan, the financing is secured for the career of a loan. You can purchase a loan for or so everything now.Loan helps you to make things affordable.You can match the term of your loan to the living of an asset you want to purchase. For example you can take a loan of one- triplet years for a machine whose working life is three years.Disadvantages of loansIf you miss a monthly payment, things might get difficult for you that may include penalties or even your property possession.It is a long term commitment. Some banks offer repayment facility but they charge surplus fees for repayments.Venture Capital TrustVenture capital trust refers to those companies that are listed on the London stock exchange, and are in search of investors to raise an equity capital of about 10 to 30 million pounds. The VCT managers are given three years to invest cash, glitz and bonds into different companies.Advantages of venture capital trustVCTs are particularly famous for providing tax good investment.They provide tax free dividendsOffer Tax free capital growthDisadvantages of venture capital trustThe VCT investment mode has high risk associations as compared to life insurance fund, collectives and other modes. The major risks areThe Unquoted companies (UK Smaller Companies)Liquidity issues (ability to sell shares)Market timing riskLeasingA lease in covenant of purpose signed for a specific time frame, conveying the use of a particular resource. Leasing is preferable when the cost of purchasing equipment is higher than the cost of leasing. The lessee gets the rights to use the equipment in exchange of lease payments to the lessor.For example in the golf industry, the golf operators make use of chartered golf cars, leased golf aeration equipment, mowing machines etc.Advantages of leasingIn lease financing the interest rate is fixed throughout the course of paymentLeasing helps in the conservation of capital as it does not outline any requirements of af riotousation of cash at the beginning.Leasing a property is much sim pler as compared to mortgage financing. (Schmidgall, 2004)Disadvantages of leasingIn lease you have to bear the cost of equipment maintenance as specified, when you are not even the owner of the equipment.Lease payments are to be paid till the termination of the original term period. So even if a lessor is facing a downturn he is salve hypothetic to make the payments that can be troublesome.Hire PurchaseNowadays, machines transport vehicle, equipment etc are bought through hire purchase. Possession of the good is transferred to the hirer but the ownership is only given after the last installment has been paid. Hirer can also choose to pay off all the installments in one go.Advantages of hire purchaseThe hirer is not bound in case of hire purchase. How can either wait for the full payment term or can go for the purchase by paying the union at once.The cost of equipment under hire purchase is less as compared to leasing.They have little statutory controlDisadvantages of hire purchas eThe cost of maintenance is to be burnt by the hirer thus lessen his profit margin.20 to 25 percent advance payment has to be paid to the vendor at the time of hire purchase contract.( Maheshwari, 2003)Business AngelsBusiness angels refer to those people that have a lot of money that they are looking to invest somewhere. They are one step ahead of friends, family founders etc.Venture CapitalistsBusiness AngelsFriendsFounders and familyHigh Risk Lower ( merely still somewhat high risk)(Source Sources of funding for Australias Entrepreneurs by Howard Frederick, Siri Terjesen, pp.30)Advantages of business angelsAs compared to the financial institutions, raising coin through business angels is beneficial as it does not involve high fees.Business angels offer different investment criteria from other instruments, offer longer investment opportunities, convenient investment processes and lower targeted rate of returns.Disadvantages of business angelsBusiness angels try to make there say in operations of the business, and can also affect the business expertise, their value and their contribution.There is a history of a clarified proportion of business angels routine out be devils, fulfilling their own motives rather than contributing into the good of the businessBusiness angels, unlike the venture capitalist are less like to re investment in the same business (Frederick and Terjesen, 2007).Short term sources of financeThe money needs for less than a year are fulfilled through short term financing. They provide a cash influx or the fulfillment of short term inventory needs and repairs as well as short term investments. For example retailers like Wal-mart make use of short term financing to build up their inventories before peak selling periods. The sources of short term finance areBank Over composesBank overdrafts are a short term medium of financing that fulfills the contingency needs of the business especially for the adjustments in the fluctuations of cash flow and sudden demands.Advantages of bank overdraftsOver draft is a simple and supple means of financingThe interest is chargeable on the everyday overdrawn amount.Disadvantages of bank overdraftThe bank can call for repayment at any time.Cannot be borrowed for larger amountsThe rate of interest for bank draft is higher than that for loans.Trade creditTrade credit is the easiest source of financing, where the suppliers of a business enable you to take up the material with the flexibility of fashioning the payment later on. So whenever material equipments etc are taken without on-spot cash payment, interchange crediting is involved.There are certain terms and conditions involved in trade crediting and depending on those terms the crediting can be costly. For example the terms involved in purchasing supplies from a supplier on trade credit is 3 percent cash discount within 12 days and a net date of 30 days. By this the supplier is lending you two percent discount on purchase price with in those 12 days. However, by using the trade credit benefit you are conserving your money for 18 more days. If we calculate on an annual basis the 3 percent discount missed may cost you more.Advantages of trade creditTrade credit is readily and conveniently available, since the suppliers are up for a business easilyIf the company is facing any financial flops, Trade credit sourcing may be beneficial as the suppliers are lenient in giving finances.Usually no or minimal security or guarantees are required in case of trade creditDisadvantages of trade creditThe giving up of the cash discount offered by the suppliers, in case of early payment, can be the biggest drawback for taking up trade credit,The firms credit rating may get affected through trade crediting (Shim and seigel, 2007)FactoringFactoring is a source of financing that is based upon the business outstanding invoices. It works in the way that the business sends a copy of the invoice received from the customer to the compu te. The factor pays a set amount of the invoice value that usually makes 80 to 85 percent of the total amount to be paid. This payment is readily done usually within twenty four hours. However, a subaltern number of invoices make the cipher uneconomical. Companies that have a turnover rate of 200,000 pounds and above can make use of the factoring.For example in India, several measures have been taken for factor development. Like the State bank of India create SBI Factors and commercial services limited in unlike states of India to help the small scale businesses who were suffering the shortage of capital.(Page 81)Advantages of factoringFactoring helps in the improvement of the firms credit managementFactoring enables a continuous inflow of fundsFactoring can be of great benefit particularly in case of need.Disadvantages of factoringAmong the different forms of short term financing, the cost of factoring is higher than othersFactoring may damage the good will of the firm from cli ents point of view, as he may see it as a sign of financial weakness (Banjerjee, 2005)Invoice DiscountingInvoice discounting is very similar to factoring except for a minor difference. In factoring the third party approaches the customer for the settlement of invoices and manages the other business details. But in invoice discounting the customers are totally unaware of your financing relationships. The company itself maintains tariff for the ledgers and invoice processing.Advantages of invoice discountingAs the customers are unaware, so the companys goodwill is not much affectedAs the cash is readily available it can be used for future investments and fund other ordersThe management no longer need to spend time on unpaid accounts and can utilize their time in planning elsewhereDisadvantages of invoice discountingTerminating the agreement can be difficult in case of invoice discountingchallenge invoices can sometimes pose a problem and should be guardedly dealt with.ConclusionSo w hether you are thinking of setting up a new business or extending the existing one, money will evermore be the first and the foremost requirement. One should always properly value the business resources for financing, as some sources may be suitable for business finance and other might not be. For example setting up a road side coffee stall requires different type of financing than setting up a garment industry business.But for many business the issue is not only to identify the right source of finance but also to find where to get the funds for setting up, expansion purpose and likewise. Therefore it is imperative to analyze the various source of financing available to a business and to assess exhaustively the appropriation of the resources in relation to the business. Investment readiness is always needed. A wealthy and beneficial financial package should, therefore, be selected as it is not only the question of money, but also the question of the whole of the life cycle of the business.