long and short term financing

Instruments of Long term financing

The long-term financial requirement means the finance needed to acquire land and building for business concern, purchase of plant and machinery and other fixed expenditure. Long term financial requirement is also called as fixed capital requirements. Fixed capital is the capital, which is used to purchase the fixed assets of the firms such as land and building, furniture and fittings, plant and machinery, etc. Hence, it is also called capital expenditure.

The amount of funds had to be arranged for long periods’ through varied long term sources such as shares, debentures, floatation of different kind of securities, ventures capital, financial institution such as commercial banks, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation (ICICI), Industrial Development Bank of India (IDBI), Life Insurance Corporation of India (LIC).

Various Source of Long Term Finance

1)Shares: Shares represent a share in the share capital of the company. In turn, it refers to the amount of money raised by the issue of share. Shares are included in long term finance

EQUITY SHARES

Equity Shares also are known as ordinary shares, which means, other than preference shares. Equity shareholders are the real owners of the company. They have control over the management of the company. Equity shareholders are eligible to get the dividend if the company earns a profit. Equity share capital cannot be redeemed during the lifetime of the company. The liability of the equity shareholders is the value of the unpaid value of shares.

PREFERENCE SHARES

The parts of corporate securities are called as preference shares. It is the shares, which have preferential right to get a dividend and get back the initial investment at the time of winding up of the company. Preference shareholders are eligible to get a fixed rate of dividend and they do not have voting rights. It means a preference shareholder enjoys two rights over equity shareholders :(a) right to receive a fixed rate of dividend and (b) right to return of capital. After settling the claims of outsiders, preference shareholders are the first to get their dividend and then the balance will go to the equity shareholders. However, the preference shareholders do not have any voting rights in the annual general body meetings of the company.

Bond and Debentures: Often companies try to procure long term besides shares are bonds and debentures. A debenture is a statement signed by the company under its seal for the debt due by it to its holders. Through this company promise to pay a specific amount of money as stated therein at a fixed date in the future together with periodic payment of interest to compensate the holders for the use of funds.

A debenture is a document issued by the company. It is a certificate issued by the company under its seal acknowledging a debt. Debentures are the loans taken by the company. It is a certificate or letter issued by the company under its common seal acknowledging the receipt of the loan. A debenture holder is the creditor of the company. a debenture holder is entitled to a fixed rate of interest on the debenture amount. Payment of interest on debenture is the first charge against profits. Apart from the loans from financial institutions, a company may raise loans through debentures. This is an additional source of long-term finance. The payment of interest and principal amounts on these debentures is subject to the terms and conditions of issue of debentures.

According to the Companies Act 1956, “debenture includes debenture stock, bonds and any other securities of a company whether constituting a charge of the assets of the company or not.”

Non-convertible debentures (NCDs): These debentures cannot be converted into equity shares and will be redeemed at the end of the maturity period.

Fully-convertible debentures (FCD_S): These debentures will be converted in equity shares after a specified period of time at one stoke or in installments.

Partly- convertible debentures (PCD_S): These are debentures will be a portion of which will be converted into equity share capital after a specified period, Whereas the non-convertible (NCD) portion of the PCD will be redeemed as per the terms of the issue after the maturity period.

Securities: The financial market equipped with primary and secondary market help the organization looking for funds to facilitate the transfer of funds of those. Who have savings and are willing to invest to entrepreneurs seeking to set up new undertaking or expand modernization and diversifying the operations of the existing ventures.

Term loans: In India term loan are being provided mainly by commercial bank, varied long term sources such as shares, debentures, floatation of different kind of securities, ventures capital, financial institution such as commercial banks, Industrial Finance Corporation of India, Industrial Credit and Investment Corporation (ICICI), Industrial Development Bank of India (IDBI), Life Insurance Corporation of India (LIC).

New Financial Instruments.

1. Non-Voting Shares

2. Detachable Equity Warrants

3. Participating Debentures

4. Participating Preference shares

5. Convertible Debentures With Options

6. Third Party Convertible Debentures

7. Mortgage-backed Securities

8. Convertible Debentures Redeemable At Premium

9. Debt-Equity Swaps

10. Zero-Coupon Convertible Note

Instruments of Short Term Finance

Such type of financial needs arises to finance in current assets such as stock, debtors, cash, etc. Investment in these assets is known as the meeting of working capital requirements of the concern. Firm require Working capital to employ fixed assets gainfully.

Apart from the capital expenditure of the firms, the firms should need certain expenditure like procurement of raw materials, payment of wages, day-to-day expenditures, etc. This kind of expenditure is to meet with the help of short-term financial requirements which will meet the operational expenditure of the firms. Short-term financial requirements are popularly known as working capital.

Source of Short Term financing

Trade Credit: -

This is a short-term credit facility extended by the creditors to the debtors. Normally, it is common for the traders to buy the material and other supplies from the suppliers on credit basis. After selling the stocks, the traders pay the cash and buy fresh stocks again on credit. Sometimes, the suppliers may insist on the buyer to sign a bill (bill of exchange). This bill is called bills payable.

Advance from Customers:

- It is customary to collect full or part of the order amount from the customer in advance. Such advances are useful to meet the working capital needs. Short-term deposited from the customers, sister companies and outsiders

It is normal to find the supermarkets and trading organizations inviting deposits of six months to one-year duration.

Internal funds:- Internal funds are generated by the firm itself by way of a secret reserve, depreciation provisions, taxation provision, and retained profits and so on and these can be utilized to meet the urgencies

Bank Overdraft:

This is a special arrangement with the banker where the customer can draw more than what he has in this savings/current account subject to a maximum limit. Interest is charged on a day-to-day basis on the actual amount overdrawn. This source is utilized to meet the temporary shortage of funds

Loans: In a loan account, the entire advance is disbursed at one time either in cash or by transfer to the current account of the borrower. It is a single advance. Except by way of interest and other charges no further adjustment is made in this account. Bank loans are extended at a fixed rate of interest. Repayment of the loan and interest are scheduled at the beginning and are usually directly debited to the current account of the borrower. These are secured loans.

Cash Credit: Cash Credit is an arrangement under which a customer is allowed an advance up to certain limit against credit granted by bank Under this arrangement, a customer need not borrow the entire amount of advance at one time: he can only draw to the extent of his requirements and deposit his surplus fund in his account.

Term loan by Bank: Term loan by a bank is an installment credit repayable over a period of time in monthly/quarterly/half yearly or yearly installment. Banks grant term loans for small projects falling under the priority sector, small scale sector and big units.

Advance against goods: Advance against goods occupy an important place in total credit. Goods are security have certain distinct advantages. They provide a reliable source of repayment. Advance against them is safe and liquid. Also, there is a quick turnover in goods, as they are in constant demand. So a banker accepts them as security. Generally, goods are charged to the bank either by way of pledge or by way of hypothecation. The term ‘goods’ includes all forms of movables which

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