Another feature of borrowed capital is regular payment of fixed interest and repayment of capital. Certain advantages of borrowing capital are as follows:. Based on the source of generation, the following are the internal and external sources of finance: The internal source of capital is the capital which is generated internally by the business. These are as follows:. The internal source of funds has the same characteristics of owned capital. The best part of the internal sourcing of capital is that the business grows by itself and does not depend on outside parties.
Disadvantages of both equity capital and debt capital are not present in this form of financing. Apart from the internal sources of funds, all the sources are external sources of capital. Deciding the right source of funds is a crucial business decision taken by top-level finance managers. The wrong source of capital increases the cost of funds which in turn would have a direct impact on the feasibility of project under concern. Improper match of the type of capital with business requirements may go against the smooth functioning of the business.
For instance, if fixed assets, which derive benefits after 2 years, are financed through short-term finances will create cash flow mismatch after one year and the manager will again have to look for finances and pay the fee for raising capital again. All others except mentioned in Internal Sources. What is the Duration of a Bond? The duration of a bond expresses the sensitivity of the bond price to changes in the interest rate.
It is not as complex as it sounds. The bonds are denominated in the Japanese currency — Yen. Meaning A revolving letter of credit is a single letter of credit that covers multiple transactions over a long period of time. Deferred coupon bonds are ones where interest is paid at maturity. The capital structure of a business needs certain financial instruments on which the interest can be deferred.
Puttable Bond is a low yield source of finance. Companies obtain funds using different financial instruments. What are Depository Receipts? Withdrawals can be repaid at any time, and as long as you remain in good standing with the bank, your line of credit can remain open and available for future funding needs. While retirement savings accounts are intended for just that — retirement — some small business owners find tapping this resource is a fast and effective way to secure short-term business funding.
Beware of potential penalties and conditions attached to retirement-fund access. If the money is not repaid, you could also end up with an increased tax liability. Small Business Administration administers loan programs for small business owners. The type of loan you qualify for will depend on your unique business needs. The SBA can also make recommendations to qualified small business lenders in your area, as well as connect you with local resources such as business banks and micro- and small-business development organizations.
If your financial need is related to a natural disaster, the SBA can refer you to disaster relief assistance. To qualify, your business must have to have an established track record and a specific level of proven sales revenue.
Preference shareholders have preferential claim on the assets and earnings of the firm over equity shareholders. The holders of these shares have the right to receive the arrears of dividend if for any year it has not been paid because of insufficient profit. The holders of these shares have the right to receive dividend out of the profits of any year. In case profits are not available in a year, the holders get nothing, nor can they claim unpaid dividends in subsequent years.
The holders of these shares are entitled to a fixed preferential dividend and in addition, carry a right to participate in the surplus profits along with equity shareholders after dividend at a certain rate has been paid to equity shareholders. Again, in the event of liquidation of the company, if after paying back both the preference and equity shareholders, there is still any surplus left, then the participating preference shareholders get additional shares in the surplus assets of the company.
These preference shares have no right to participate in the surplus profits of the company on its liquidation. Such shareholders are entitled to a fixed rate of dividend only. These preference shares can be converted into equity shares after a specified period of time. The conversion of such shares can be made as per the provisions of the Articles of Association. These preference shares are redeemed before liquidation of the company as per terms of issue in accordance with the provisions of Articles of Association.
These preference shares are not redeemed before liquidation of the company. Such shares are not redeemed unless a company is liquidated. After the Commencement of Companies Amendment Act, , no company can issue irredeemable preference shares or preference shares which are redeemable after the expiry of a period of ten years from the date of their issue.
A debenture is a document of acknowledgement of a debt with a common seal of the company. It contains the terms and conditions of loan, payment of interest, redemption of the loan and the security offered if any by the company.
According to Section 2 12 of the Companies Act, , debenture includes debenture stock, bonds and any other securities of a company, whether constituting a charge on the assets of the company or not. It is an instrument for raising long-term debt. Debenture holders are the creditors of the company. They have no voting rights in the company. Debenture may be issued by mortgaging any asset or without mortgaging the asset, i. Interest on debenture is payable to debenture holders even when the company does not make profit.
The cost of debenture is very low as the interest payable on debentures is charged as an expense before tax. These debentures are transferable like negotiable instruments, by mere delivery.
The holder of such debenture receives the interest when it become due. The transfer of such debenture is recorded in the register of the company. These debentures are secured by creating a charge on the assets of the company.
The charge may be fixed or floating. If a company fails to pay debentures interest in due time or repay the principal amount, the debenture holders can recover their dues by selling the mortgaged assets. When debentures are issued without any charge on the assets of the company, such debentures are called naked or unsecured debentures. These are debentures which are issued for a specified period of time. On the expiry of that specified time the company has the right to pay back the debenture holders.
The redemption may be effected by direct payment or by purchase and cancellation of own debenture or by annual drawings or by periodical instalments etc. These are the debentures regarding which the names, addresses and other particulars of holdings of the debenture holders are recorded in a register maintained by the company.
Transfer of these debentures will take place only on the execution of the transfer deed. Interest is payable to the person whose name is registered with a company.
These are the debentures which are not repayable during the lifetime of the company and will be repaid only when the company goes into liquidation. A company may issue convertible debentures in which case an option is given to the debenture holders to convert them into equity or preference shares at stated rates of exchange, after a certain period.
Such debentures—once converted into shares cannot be reconverted into debentures. Convertible debentures may be fully or partly convertible. These are the debentures which are not converted into shares and are redeemed at the expiry of specified period.
As the debenture holders have no voting rights, so the issue of debenture does not affect the management of the company. It is an admissible expense for the purpose of taxation.
Sources of Short-Term and Long-Term Financing for Working Capital. A constant flow of working capital is an intrinsic component of a successful business.
SOURCES OF SHORT-TERM CAPITAL Trade creditors Suppliers extending credits to a buyer for use in manufacturing, processing, or reselling goods for profits.
Aug 29, · Long-Term vs. Short-Term Sources Long-term and short-term sources of finance are viewed differently by experts. Analysts consider that a company with a large amount of short-term debt to be more vulnerable financially. In business finance: Short-term financing The main sources of short-term financing are (1) trade credit, (2) commercial bank loans, (3) commercial paper, a specific type .
Short-term financing deals with the demand for and supply of short-term funds which may either be secured or unsecured. SOURCES OF SHORT- ADVANTAGES OF SHORT-TERM CREDITS. Sources of working capital can be spontaneous, short term and long term. Spontaneous working capital includes mainly trade credit such as sundry creditor, bills payable, and notes payable. Short term sources are tax provisions, dividend provisions, bank overdraft, cash credit, trade deposits, public deposits, bills discounting, short term loans, inter corporate loans, and commercial paper.