Sources of Funds
5
Types of Financing
BASIC CONCEPTS
1.
Sources of Funds
There are several sources of finance/funds available to any company. Some of the parameters that need to be considered while choosing a source of fund are:
•
•
Tenure
•
Leverage planned by the company
•
Financial conditions prevalent in the economy
•
2.
Cost of source of fund
Risk profile of both the company as well as the industry in which the company operates. Categories of Sources of Funds
(i)
Long term
Refer to those requirements of funds which are for a period exceeding 5 -10 years. All investments in plant, machinery, land, buildings, etc., are considered as long term financial needs.
Share capital or Equity share
Preference shares
Retained earnings
Debentures/Bonds of different types
Loans from financial institutions
Loans from State Financial Corporation
Loans from commercial banks
Venture capital funding
Asset securitisation
International financing like Euro-issues, Foreign currency loans
© The Institute of Chartered Accountants of India
5.2
Financial Management
(ii) Medium term
Refer to those funds which are required for a period exceeding one year but not exceeding 5 years.
Preference shares
Debentures/Bonds
Public deposits/fixed deposits for duration of three years
Commercial banks
Financial institutions
State financial corporations
Lease financing/Hire-Purchase financing
External commercial borrowings
Euro-issues
Foreign Currency bonds
(iii) Short term
Investment in these current assets such as stock, debtors, cash, etc. assets is known as meeting of working capital requirements of the concern. The main characteristic of short term financial needs is that they arise for a short period of time not exceeding the accounting period. i.e., one year.
Trade credit
Accrued expenses and deferred income
Commercial banks
Fixed deposits for a period of 1 year or less
Advances received from customers
Various short-term
Types of Financing
BASIC CONCEPTS
1.
Sources of Funds
There are several sources of finance/funds available to any company. Some of the parameters that need to be considered while choosing a source of fund are:
•
•
Tenure
•
Leverage planned by the company
•
Financial conditions prevalent in the economy
•
2.
Cost of source of fund
Risk profile of both the company as well as the industry in which the company operates. Categories of Sources of Funds
(i)
Long term
Refer to those requirements of funds which are for a period exceeding 5 -10 years. All investments in plant, machinery, land, buildings, etc., are considered as long term financial needs.
Share capital or Equity share
Preference shares
Retained earnings
Debentures/Bonds of different types
Loans from financial institutions
Loans from State Financial Corporation
Loans from commercial banks
Venture capital funding
Asset securitisation
International financing like Euro-issues, Foreign currency loans
© The Institute of Chartered Accountants of India
5.2
Financial Management
(ii) Medium term
Refer to those funds which are required for a period exceeding one year but not exceeding 5 years.
Preference shares
Debentures/Bonds
Public deposits/fixed deposits for duration of three years
Commercial banks
Financial institutions
State financial corporations
Lease financing/Hire-Purchase financing
External commercial borrowings
Euro-issues
Foreign Currency bonds
(iii) Short term
Investment in these current assets such as stock, debtors, cash, etc. assets is known as meeting of working capital requirements of the concern. The main characteristic of short term financial needs is that they arise for a short period of time not exceeding the accounting period. i.e., one year.
Trade credit
Accrued expenses and deferred income
Commercial banks
Fixed deposits for a period of 1 year or less
Advances received from customers
Various short-term