DBB2104 Unit-09

DBB2104: Financial Management Manipal University Jaipur (MUJ)
BACHELOR OF BUSINESS
ADMINISTRATION
SEMESTER 3
DBB2104
FINANCIAL MANAGEMENT
Unit 9: Sources of Finance 1

Unit 9
Sources of Finance
Table of Contents
SL Topic Fig No / Table SAQ / Page No

No / Graph Activity
1 F1
Introduction
1.1 Learning Objectives
2 Long Term Sources of Finance F2, F3 1
3 Short-Term Sources of Finance F4 2
4 Summary
5 Glossary
6 Case Study
7 Terminal Questions
7.1 Answers
8 Suggested Books and E-References

1. INTRODUCTION
What makes a good financial manager? The world is well aware of the importance of good
financial managers. As a result, there is abundant advice on how to become a financial
manager. Financial management is a blend of art and science through which the important
decisions are taken: what to invest in, how to finance it, and how to combine the two in order
to maximise some appropriate objectives like profit maximization and wealth maximization.
Researchers worldwide have discussed the different sources of

STUDY NOTE
finance from various perspective. Scholarly studies on the
According to various
management of funds have come up with a wide variety of researchers, a company
always maintains a
concepts to define the core ideology of owed and owned sources certain part of their profit
of funds. Some researchers explain that the sources of funds play in the form of retained
profits or retained
a very important role in the overall development of the economy. earnings, which acts as
the main source of
internal financing.
Money is raised for various reasons. When a company or a
separate business unit within the same company is taken into consideration, its traditional
requirement may be in different forms, such as the acquisition of capital in the form of land,
building, machinery, etc. There are certain conditions where the development of a new
product is required. Capital is required again in such cases, and these are financed through
internal sources. Short term capital is required for looking after the day-to-day management
of expenses of the firm, which may be in the form of bank overdraft or short-term loans.
This chapter will give you insights into different sources of raising funds, such as those for a
short time span also referred to as short-term sources of finance and on the other hand those
for a longer duration which are treated as a long-term source of finance. We will further
discuss the classification of different sources that may be in the form of owed funds or owned
funds.
You will understand the role of the different sources of finance through the classification of
different types of funds and how this would help in achieving the goals of a financial manager.

SOURCES OF FINANCE
SHORT-TERM
LONG-TERM SOURCE OF FINANCE
SOURCE OF FINANCE
Fig 1: Sources of Finance
1.1 LEARNING OBJECTIVES

After studying this chapter, you will be able to:
❖ Understand the concept of owed and owned funds
❖ Know different sources of finance both internal and external
❖ Compare the different kinds of long-term sources of finance
❖ Understand the different kinds of short-term sources of finance

2. LONG TERM SOURCES OF FINANCE

Long term finance or long-term capital forms the financial foundation of a firm. It is
important because it is the only source of financing for the firm up to the income generating
stage. It is required to finance fixed assets and also for core working capital. Long-term
finance covers a period of five years or more. A summary of the sources of finance is given in
the following chart:
Fig 2: Sources of long-term finance
• Equity shares
Issue of equity (or ordinary) shares is the most popular source of long-term finance. It
represents ownership capital, which shares the risk and reward associated with the
ownership of corporate enterprises. Ordinary shares are a source of permanent capital since
they do not have a maturity date. They are variable cost bearing securities since the payment
of dividends on such shares is neither fixed nor compulsory.
Features of ordinary/equity shares

1. Ordinary shareholders have a residual claim on the income of the company.

2. Ordinary shareholders’ claim on assets of the company in case of liquidation is also

residual.
3. Ordinary shareholders have the right to control the operations of/participate in the
management of the company.
4. The ordinary shareholders exercise their control through voting in the meeting of the
company.
5. Equity shares have no maturity period. Hence, they cannot be redeemed during the
lifetime of a company.
• Preference shares
The Companies Act 2013, defines preference share capital as that part of share capital which
carries preferential rights as to (i) the payment of dividend at a fixed rate and (ii) return of
capital on winding up of the company. It does not create an obligation as preference dividend
is payable only when there are profits and that too at a specified rate.
Preference share capital is a hybrid form of finance. It has some characteristics of equity
capital and some of debt capital. It is similar to debenture in so far as: (i) it carries a fixed
rate of dividend. (ii) it ranks higher than equity shares as a claimant to the income of assets.
(iii)it normally does not have voting rights. (iv) it does not have a share in residual earnings
and assets.
Features of preference shares

1. Preference share capital has a prior claim over equity capital both on the income and
assets of the company.
2. Preference capital is also called a fixed income security.
3. The call feature permits the company to buy back its preference shares.
4. Preference shares ordinarily do not carry voting rights.
5. A company can issue preference shares which can partly or fully be converted into
equity shares and debentures.
• Retained earnings/Ploughing back of profit
It is a technique of financial management under which all profits of the company are not
distributed among the shareholders as dividends. A part of the profit is retained in the
business. The process of retaining profits, year after year, and then utilising them in the
business is known as ploughing back of profits.

Features of retained earnings/ploughing back of profit

1. These funds have no explicit cost for the firm.
2. It is an internal source of finance. It is also called self-finance.
3. These funds can also be used to redeem old debts and for meeting a working capital
requirement.
4. A company can evade dividend tax on retained earnings.
5. A company with a large reserve act as a cushion to absorb the shocks of the economy.
• Debentures/Bonds
A company can raise funds by issuing debentures. A debenture is an instrument of
acknowledgement of a debt under the common seal of the company. An alternative term of
debentures in India is bond. In actual practice, debentures refer to long-term or perpetual
indebtedness.
According to Section 2 (12) of the Indian Companies Act, “Debenture includes debenture
stocks, bonds and any other securities of a company, whether constituting a charge on the
assets of the company or not.” Terms of repayment of the principal sum and payment of
interest are given in each debenture certificate. Thus, If the rate of interest is 12%, it will be
referred to as “12% debentures.” The debentures are paid a fixed rate of interest whether or
not a dividend is declared on the preference share/equity share. It is thus, a long-term fixed
income financial security.
Features of Debentures
1. Interest rate on debentures is always fixed and known.
2. Debentures are issued for a specific period.
3. In India, debentures are secured by a charge on the present and future immovable
assets of the company by the way of an equitable mortgage.
4. A company may issue debentures which are convertible into equity or preference
shares at the option of the debenture holder.
5. All debentures must be compulsorily rated by one or more of the credit rating agencies
operating in India e.g., CRISIL, ICRA, CARE, and FITCH India.

• Term loans
Term loans are sources of medium term and long-term debt. In India, they are generally
obtained for financing large expansions, modernisation, or diversification of projects or
working capital margin. This method of finance is also known as project finance. A term loan
is granted on the basis of a formal agreement between the borrower and the lending
institution. Historically, banks and specially created financial institutions have been the
primary source of long-term finance.
Features of Term Loans

1. The period of term loans is for more than five years.
2. Term loans are negotiated between the firm and the bank or financial institution.
3. Term loans are generally secured by a fixed or floating charge on company assets.
4. Term loans have restricted covenants on borrower firms.
5. They are used for expansion projects.
• Special financial institutions (SFIs)
With the declaration of the first industrial policy resolution in 1948 for the rapid industrial
development of the country, the Government of India established a series of special financial
institutions. These institutions cater to the needs of the industries by financing them for
medium and long-term. Interest is charged on such loans at a fixed rate and the amount of
the loan is to be repaid in instalments over a number of years. SFIs provide loans to
industries and their basic objective is to boost the economy.
Features of a special financial institution

1. It provides direct rupee and foreign currency loans and advances for setting up new
industrial projects.
2. It provides services like merchant banking and lease financing.
3. It provides guidance in project identification, formulation, implementation, operation,
etc., to new entrepreneurs.
4. It provides services like bill discounting and rediscounting facilities to cover and pro-
mote the sale of indigenous machinery and equipment.
5. It also assists in promotional activities for developing industries.

These financial institutions have been further classified below:
SPECIAL FINANCIAL INSTITUTIONS
INDUSTRIAL FINANCIAL CORPORATION OF INDIA
THE INDUSTRIAL DEVELOPMENT BANK OF INDIA
THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

OF INDIA
INDUSTRIAL RECONSTRUCTION BANK OF INDIA
UNIT TRUST OF INDIA
NABARD
STATE FINANCIAL CORPORATION
STATE FINANCIAL CORPORATION
STATE INDUSTRIAL DEVELOPMENT CORPORATIONS
EXIM BANK OF INDIA
Fig 3: Types of Special Financial Institutions

SELF ASSESSMENT QUESTIONS – 1
1. In general, long-term debt costs less than short-term debt (True/False)

2. Ordinary shares have voting rights (True/False)
3. Ownership securities are:
a) Equity Shares
b) Preference Shares
c) Debentures
d) A and B both
4. A term loan is granted on the basis of a formal agreement between the
borrower and the _____________ institution.
5. Ordinary shares are the source of capital.

3. SHORT-TERM SOURCES OF FINANCE

Short-term sources of finance are offered for a short time span. Short-term finance includes
working capital funds from banks, capital funds from banks, public deposits, commercial
papers, factoring of receivables, etc. These sources of funds are for a period of one year or
less.
The finance manager has to think about the fulfilment of the financial objectives of a firm
before deciding upon a combination of short and long-term sources of finance.
A summary of the sources of short-term finance is given in the following chart:
SOURCES OF SHORT-TERM
FINANCE
SPONTANEOUS SOURCES
PAPER
TRADE CREDIT
LETTER OF CREDIT
ACCRUED EXPENSES
BILL DISCOUNTING
DEFERRED INCOME
FACTORING ACCOUNTS
RECEIVABLE
Fig 4: Classification of short-term finance

• Trade credit
Trade credit enables purchase of goods by making immediate payments. Trade credit is
normally extended to business organisations depending on the conventions of the trade and
competition prevailing in the industry and the relationship between the supplier and the
buyer. It contributes to about one third of the total short-term credit and hence it is one of
the most popular forms of working capital finance.
If a buyer is able to get the credit without any legal evidence, merely on relationship, it is
called an open account trade credit and appears in the balance sheet of the buyer as ‘trade
creditor’ or ‘sundry creditor’.
When an instrument is given such as a bill of exchange in acknowledgement of the debt it

appears as bills or notes payable in the balance sheet.
Features of trade credit

1. Trade credit is extended on an open account basis.
2. A firm sends a purchase order to a supplier who evaluates creditworthiness of the firm
using various information sources.
3. Trade credit is considered a spontaneous source of finance because it normally expands
as the volume of a company’s purchase increases.
• Accrued expenses
An accrued expense represents a liability that a firm has to pay for the services which it has
already received. Thus, they represent an interest free source of financing.
Accrued wages and salaries, the firm incurs a liability the moment employees have rendered
the services. They are however paid afterwards, usually in monthly instalments. The greater
the amount of funds provided by the workers, the longer will be the payment interval.
Accrued taxes and interest corporate taxes are paid after the firm has earned a profit. During
the year in which earnings are received, these taxes are charged quarterly. This is a deferred
payment of the firm’s obligation and thus is a source of finance.
Features of accrued expenses

1. Accrued expenses refer to the liabilities for services rendered to the firm.
2. They constitute an interest free source of financing.

• Deferred income
Deferred income consists of payments received for goods and services that a firm has agreed
to deliver at some future date because these payments increase the firm’s liquidity and
assets, namely cash, they constitute a source of funds.
Advance payments made by customers are the primary source of deferred income. These
payments are common on large, expensive products such as aircrafts. Because these
payments are not earned by the firm until delivery of the goods or services to the customers,
they are recognised on the balance sheet as liability called deferred income.
Features of deferred income

1. Deferred income is that part of income that represents the future.
2. These receipts generally increase the liquidity of the firm.
3. They are the payments which are made in advance by the customers.
• Commercial paper
Commercial paper are unsecured promissory notes issued by the firm to raise short term
funds. Only large companies that enjoy high credit rating and sound financial health can issue
a commercial paper to raise short term funds.
To assess a company’s eligibility for the issuance of a commercial paper, the RBI has defined
a number of conditions. Only, a company which is listed on a stock exchange and has a net
worth of at least rupees 10 crores and a maximum permissible bank finance of rupees 25
crores can issue commercial paper not exceeding 30% of its working capital limit.
It is sold at a discount from its face value and redeemed at face value on its maturity. As a
result, the cost of raising funds in this way is a function of the amount of discount and the
maturity period, and the RBI does not include an interest rate for this purpose.
Commercial papers are typically purchased by banks, insurance companies, unit trusts, and
businesses to spend excess funds for a limited period of time.
Features of commercial paper

1. A credit rating agency called CRISIL has been set up in India by ICICI and UTI to rate
commercial papers.

2. Commercial papers are considered as a cheaper source of raising finance as compared

to bank credit.
3. Commercial papers are used as a source of finance by large companies enjoying high
credit ratings and sound financial health.
4. These funds cannot be redeemed before the date of maturity even if the issuing firm
has surplus funds to pay back.
• Letter of credit
Suppliers, especially foreign suppliers, insist that the buyer should ensure that a bank will
make the payment if they fail to honour their obligations. This is ensured through a letter of
credit arrangement. A bank opens a L/C in favour of a customer to facilitate his purchase of
goods. If the customer does not pay the supplier within the credit period, the bank makes the
payment. This arrangement passes the risk of the supplier to the bank. Bank charges the
customer for opening the letter of credit. It is an indirect arrangement of finance.
Features of Letter of Credit

1. It is a negotiable instrument.
2. In some cases, a letter of credit is revocable and it may be irrevocable.
3. The letter of credit demands payment through two features: sight or time.
• Bill Discounting
It is the oldest and the simplest form of financing. Bills arising out of a business transaction
are sold to a financial intermediary at a discount. In return the financial intermediary
releases funds for the immediate use of the firm. The intermediary profit is the discount.
Moreover it can further rediscount the bill or wait until it matures.
Features of bill discounting

1. These bills are discounted through financial intermediaries.
2. They are released immediately after deducting discounting charges.
3. These bills have fixed maturity date followed by a grace period of three days.
• Factoring accounts receivable
Factoring accounts receivables seem like a loan since the accounts receivables are pledged
as collateral, but it is actually somewhat different. Factoring is the sale of accounts
receivables of a firm or business to another third party called a factor at a discount. There
are three major types of factoring arrangements:

1. Maturity factoring.
2. Conventional factoring.
3. Maturity factoring with an assignment of equity.
Features of factoring accounts receivable

1. Factoring may be on recourse basis.
2. A factor is a funding source which offers services relating to management and financing
of debts arising out of credit sales.
3. Factoring is considered to be a costly source of financing as compared to other sources
of short-term finance.
SELF ASSESSMENT QUESTIONS – 2
6. Which of the following is not a form of short-term, spontaneous credit?

a) Accrued wages
b) Trade credit
c) Commercial paper
d) Accrued taxes
7. Which of the following is known as ‘commercial paper’
a) Short-term security
b) Long-term security
c) Long-term unsecured securities
d) None of the above
8. The most common type of spontaneous financing is trade credit. (True/False)
9. Commercial paper is a cheaper source of raising finance as compared to
bank credit. (True/False)
10. Public deposits are the deposits accepted by a business enterprise
directly from the public.

4. SUMMARY
• Long term finance covers over a period of five years or more.
• Ordinary shares are a source of permanent capital since they do not have a maturity
date. They are the variable cost bearing securities, since the payment of dividends on
such shares is neither fixed nor compulsory.
• Preference share capital is a hybrid form of financing. It has some characteristics of
equity and debt.
• The process of retaining profits, year after year, and their reinvestment in the business
is known as ploughing back of profits.
• According to Section 2 (12) of the Indian Companies Act, “Debenture includes
debenture stocks, bonds and any other securities of a company, whether constituting a
charge on the assets of the company or not.” Terms of repayment of the principal sum
and payment of interest are given in each debenture certificate.
• A term loan is granted on the basis of a formal agreement between the borrower and
the lending institution. Historically, banks and specially created financial institutions
have been the primary source of long-term finance.
• The financing of current assets can be done either through long term or short-term
financing.
• When short-term sources are used it is termed an aggressive approach, the return in
this approach is higher but so is the risk involved.
• When long term sources of finance are used more than short term sources, it is referred
to as a conservative approach. It increases the liquidity and reduces the risk in a firm
but the returns on investment also diminish.
Banks can also use various types of methods such as cash credit, bank overdraft, bill
discounting, line of credit, etc. to give credit to a firm.

5. GLOSSARY
Accrued wages: Accrued wages are the liability, which remains pending beyond the end of
the financial year. This liability is reflected in the balance sheet of a firm under the section
‘current liabilities’, where there is an obligation to clear these liabilities within one year.
Assets: Assets may be described as valuable resources owned by a business which were
acquired at a measurable money cost.
Cash credit/overdraft: Under cash credit/overdraft/arrangement of bank finance, the bank
specifies a predetermined borrowing/credit limit.
Dividend: It is that part or that proportion of profit, which is distributed among the
shareholders.
Factoring: It provides resources to finance receivables as well as facilitates the collection of
receivables.
Fixed assets: They are the assets acquired to be retained in business on a long-term basis to
produce goods and services and are not for sale.
Floating cost: Cost incurred in issuing securities, for instance, underwriting and brokerage
cost, printing, legal, publicity, and so on.
Liquidity: Ability to meet short-term obligations when they become due.
Long term financing: It is that part of financing which is done for a longer duration. Any
financing done for five years or more is treated as long term finance.
Retained earnings: The portion of the after-tax profits that is not paid out to shareholders
as dividends.
Yield: The actual return received by an investor. It is a function of the return of interest and
the market price of the security.

6. CASE STUDY
Working capital management
After running as a family business for over 100 years, when in late 1990s, the management
of the Dabur was handed over to a team of hired professional managers, the new
management faced the gigantic task of improving performance in several critical areas.
In particular, working capital management required urgent attention as the company’s

performance in these areas had been far from satisfaction. The prevailing current ratio of 3:2
and a quick ratio of 2:4 was considered too high and indicative of heavy and unnecessary
investments in working capital that would have a negative effect on the company’s
profitability.
Efforts to improve the working capital efficiency were met with stiff resistance from various
quarters but finally yielded results. The case study discusses the policies adopted to improve
the working capital management performance, and how through concerted efforts, the
management turned around a highly inefficient working capital management into one of the
most efficient ones in the FMCG sector of the Indian industry. In fact, the company seemed
to have gone to the other extreme of negative working capital, with the current ratio
declining to 0.8 and the quick ratio declining to 0.4 in 2004-05.
In 2005-06 as the company was ready to launch itself into the next phase of fast growth,
several critical issues related to the liquidity and solvency of the company confronted the
management which are also discussed in the case study.
a) What is the disadvantage of having unnecessary investment in working capital?

b) Give the SWOT analysis of the case study.

7. TERMINAL QUESTIONS
SHORT ANSWER QUESTIONS
Q1. What are equity shares? Q2. What is a preference share?
Q3. Differentiate between a debenture and a share. Q4. What are commercial papers?
Q5. What do you understand by discounting of bill?
LONG ANSWER QUESTIONS

Q1. What is are the various sources of long-term finance for a firm?
Q2. What is trade credit? What are their features?
Q3. Explain the term debenture and state the features of debentures. Q4. Explain the
spontaneous source of short-term financing?
7.1 ANSWERS
SELF ASSESSMENT QUESTIONS
1. False
2. True
3. Equity and Preference
4. Lending
5. Permanent
6. Commercial Paper
7. Short-term Security
8. True
9. True
10. Fixed
SHORT ANSWER QUESTIONS

Answer 1: Issue of equity (or ordinary) shares is the most popular source of long-term
finance. It represents ownership capital, which share the risk and reward associated with
the ownership of corporate enterprises.

Answer 2: The Companies Act 2013 defines preference share capital as that part of share
capital which carries preferential rights as to (i) the payment of dividend at a fixed rate and
(ii) return of capital on winding up of the company.
Answer 3:
Basis of Shares Debentures

difference
Portion of capital Shares are a part of the capital Debentures constitute a
of the company. loan of the company.
Income security An equity share is a A debenture is a
variable income fixed income
security. security.
Answer 4: Commercial paper represents unsecured promissory notes issued by the firm to
raise short term funds. Only large companies enjoying high credit rating and sound financial
health can issue commercial papers to raise short term funds.
Answer 5: It is the oldest and the simplest form of financing. Bills arising out of a business
transaction is sold to a financial intermediary at a discount. In return the financial
intermediary releases funds for the immediate use of the firm. The intermediary profit is the
discount. Moreover, it can further rediscount the bill or wait until matures.
LONG ANSWER QUESTIONS
Answer 1:
There are various sources of long-term finance are as follows: -

• Trade Credit
Trade credit is granted to a company when it obtains goods or items from a supplier and
pays for them over time rather than immediately. Trade credit is typically given to
businesses based on industry conventions, competitiveness, and the supplier-buyer
relationship.
• Accrued Expenses
A liability that a company must pay for services it has already received is known as an
accumulated expense. As a result, they serve as an interest-free source of capital.

The firm incurs a liability for accrued wages and salary the moment employees deliver
services. They are, however, paid thereafter, usually at monthly intervals.
• Deferred Income
Payments received for goods and services that a corporation has agreed to deliver at a later
period are referred to as deferred income. These payments boost the firm’s liquidity and
assets, notably cash, and thus serve as a source of finances.
• Commercial Paper
Commercial paper is a type of unsecured promissory note that a company issues to raise
short-term finance. Commercial paper can only be issued by major enterprises with a good
credit rating and stable financial health.
• Letter of Credit
Suppliers, particularly foreign suppliers, request that the buyer ensure that the bank would
pay if the buyer fails to meet his obligations. A letter of credit is used to ensure this that the
payment is made within time.
• Bill Discounting
It is the simplest and oldest method of funding. A bill stemming from a commercial
transaction is discounted and sold to a financial intermediary. In exchange, financial
intermediaries provide funds for the firm’s immediate usage.
• Factoring Accounts Receivable

Factoring accounts receivables may seem like a loan because the accounts receivables are
pledged as collateral. But it is actually quite different. Factoring is the sale of a company
entity’s accounts receivables at a discount to another third party, termed the factor.
Answer 2:
• Trade Credit
Trade credit is given to a company when it obtains products or commodities from a supplier
and pays for them over a set period of time rather than immediately. Trade credit is usually
granted to businesses based on industry conventions and competitiveness, as well as the
relationship between the supplier and the customer.

Features of Trade Credit

1. Trade credit is extended on an open account basis.
2. A firm sends a purchase order to a supplier who evaluates creditworthiness using
various information sources.
3. Trade credit is considered as a spontaneous source of financing because it normally
expands as the volume of company’s purchase increases.
Answer 3:
Debentures / Bonds
A company can raise funds by issuing debentures. A debenture is an instrument of
acknowledgement of a debt under the common seal of the company. An alternative term of
debentures in India is bond. In actual practice, debentures refer to long term or perpetual
indebtedness.
“Debenture includes debenture stocks, bonds, and any other securities of a company,
whether creating a charge on the company’s assets or not,” says section 2 (12) of the Indian
Companies Act, 1956. Each debenture certificate specifies the terms of principle repayment
and interest payment. If the interest rate is 12 percent, the debentures are referred to as “12
percent debentures.” Whether or not a dividend is declared on the preference share / equity
share, the debentures are paid a predetermined rate of interest. As a result, it is a financial
security with a long-term fixed income.
Features of Debentures
1. Interest rate on debentures is always fixed and known.
2. Debentures are issued for a specific period of time.
3. In India, debentures are secured by a charge on the present and future immovable
assets of the company by the way of an equitable mortgage.
4. A company may issue debentures which are convertible into equity or preference
shares at the option of the debenture holder.
Answer 4:
• Trade Credit
Trade credit is given to a company when it obtains goods or items from a supplier and does
not pay for them right once, but rather over a period of time. Trade credit is usually provided

to businesses based on industry conventions, competitiveness, and the relationship between

the supplier and the customer. It accounts for around a third of all short-term credit and is
thus one of the most common types of working capital financing.
• Accrued Expenses
A liability that a company must pay for services it has already received is known as an
accumulated expense. As a result, they are an interest-free source of capital.
The firm incurs a liability for accrued wages and salary the moment employees deliver
services. They are, however, paid afterward, usually at monthly intervals. The bigger the
amount of funds contributed by the employees, the longer the payment interval.
• Deferred Income
Payments received for goods and services that a corporation has agreed to deliver at a later
period are referred to as deferred income. These payments boost the firm’s liquidity and
assets, notably cash, and thus serve as a source of finances.

8. SUGGESTED BOOKS AND E-REFERENCES

BOOKS
• Pandey, 2020. I. M : Financial Management, Vikas Publication.
• Khan, M. Y, 2018. Financial Management, Tata Mc Graw Hill.
• James C. Van Horne, 1998: Financial Management and Policy, Prentice Hall of India,
New Delhi.
• John Hampton, 1997: Financial Decision–Making, Englewood Cliffs, New Jersey,
Prentice Hall Inc.
REFERENCES
• https://efinancemanagement.com/sources-of-finance
• Ekpenyong, D. B., & Nyong, M. O. (1992). Small and medium scale enterprises in Nige-
ria: Their characteristics, problems and sources of finance. AERC, Nairobi, KE.
• Keasey, K., & McGuinness, P. (1990). Small new firms and the return to alternative
sources of finance. Small Business Economics, 2(3), 213-222.
• Addison, T., Mavrotas, G., & McGillivray, M. (2005). Aid, debt relief and new sources of
finance for meeting the millennium development goals. Journal of International
Affairs, 113-127.
• https://www.tutorialspoint.com/explain-various-sources-of-finance-in-financial-
management

DBB2104 Unit-09

Uploaded by

Copyright:

Available Formats

DBB2104 Unit-09

Uploaded by

Document Information

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

DBB2104 Unit-09

Uploaded by

Copyright:

Available Formats

DBB2104: Financial Management Manipal University Jaipur (MUJ)

Unit 9: Sources of Finance 1

SL Topic Fig No / Table SAQ / Page No

Unit 9: Sources of Finance 2

Researchers worldwide have discussed the different sources of

Unit 9: Sources of Finance 3

Fig 1: Sources of Finance

1.1 LEARNING OBJECTIVES

Unit 9: Sources of Finance 4

2. LONG TERM SOURCES OF FINANCE

Fig 2: Sources of long-term finance

Features of ordinary/equity shares

Unit 9: Sources of Finance 5

2. Ordinary shareholders’ claim on assets of the company in case of liquidation is also

Features of preference shares

Unit 9: Sources of Finance 6

Features of retained earnings/ploughing back of profit

Unit 9: Sources of Finance 7

Features of Term Loans

Features of a special financial institution

Unit 9: Sources of Finance 8

These financial institutions have been further classified below:

SPECIAL FINANCIAL INSTITUTIONS

INDUSTRIAL FINANCIAL CORPORATION OF INDIA

THE INDUSTRIAL DEVELOPMENT BANK OF INDIA

THE INDUSTRIAL CREDIT AND INVESTMENT CORPORATION

INDUSTRIAL RECONSTRUCTION BANK OF INDIA

UNIT TRUST OF INDIA

STATE FINANCIAL CORPORATION

STATE FINANCIAL CORPORATION

STATE INDUSTRIAL DEVELOPMENT CORPORATIONS

EXIM BANK OF INDIA

Fig 3: Types of Special Financial Institutions

Unit 9: Sources of Finance 9

SELF ASSESSMENT QUESTIONS – 1

1. In general, long-term debt costs less than short-term debt (True/False)

Unit 9: Sources of Finance 10

3. SHORT-TERM SOURCES OF FINANCE

A summary of the sources of short-term finance is given in the following chart:

Fig 4: Classification of short-term finance

Unit 9: Sources of Finance 11

When an instrument is given such as a bill of exchange in acknowledgement of the debt it

Features of trade credit

Features of accrued expenses

Unit 9: Sources of Finance 12

Features of deferred income

Features of commercial paper

Unit 9: Sources of Finance 13

2. Commercial papers are considered as a cheaper source of raising finance as compared

Features of Letter of Credit

Features of bill discounting

Unit 9: Sources of Finance 14

Features of factoring accounts receivable

SELF ASSESSMENT QUESTIONS – 2

6. Which of the following is not a form of short-term, spontaneous credit?

Unit 9: Sources of Finance 15

Unit 9: Sources of Finance 16

Unit 9: Sources of Finance 17

In particular, working capital management required urgent attention as the company’s

a) What is the disadvantage of having unnecessary investment in working capital?