Sources Of Finance For A Public Limited Company Finance Essay

Sources Of pay For A Public Limited Comp both Finance EssayFinance is the basic ingredient of a military control. Insufficiency or absence of cash backside pose a threat for a business. Without cash a business is unable to survive. Various ascendants of pay help to fulfill the needs of wages, advertising, expansion, salary of interests etc (Pride et.al, 2009). Different sources of finance be used depending upon their maturity period. Each source has its advantages and disadvantages.Sources of financeThe sources of finance are broad classified into the following immense term FinanceMedium term financeShort term financeLong Term Sources of FinanceLong term sources of finance are those methods that are adopted to provide finance for a colossal period of succession. This period of time must be of unmatchable year and above. Long term sources are generally complex and are usually adopted to fund activities like personnel casualty for acquisitions, product extensions, or buying up of new premises etc. Example of long term pay includes a 40 year owe or a 10 year treasury note. The sources of long term finance areDebenturesDebentures are the long term loans raised from public by a Public limited union. These debentures are usually ranged from 0.01$ to 100$ with varied interest drifts. Debentures are floated with certain price and conditions and are generally secured against the assets of a phoner (Chakraborty, 2004).Advantages of debenturesDebentures are a well suited mode of long term financing as the interest payable on debentures is made before taxation. some otherwise advantage of debenture is that they are payable even when the company does not produce attain.Issue constitute of debenture is low as compared to that of gustatory sensation smashing and equity.Disadvantages of debenturesAs mentioned above, certain terms and conditions are set out for debentures. Failure to meet those conditions, like interest and principal repayment requiremen t, can result in not unless fiscal and social humiliation just now can also lead to bankruptcy.Debentures are influenced by the pomposity paces. If, by chance the inflation stride significantly drops down, then the real cost of the debt will become higher than what was initially set (Chandra, 2008).Convertible debenturesConvertible debentures fissure the advantage of quickly conversion of debt into equity. Convertible debentures are similar to the normal debentures in terms of interest judges particularizedation and the principal payment, except that in convertible debentures the emptor has the option of converting them into companys issuing share at a pre decided ratio.Convertible debentures are used by the companies to attract postors. Like the Essar steel, India issued convertible debentures coupled with sanction and loyal verifiers as well as optionally fully convertible debentures to attract investors (Nidheesh, 2009).Advantages of convertible debenturesConvertible debentures are favorable 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 through participation in the stemma options and guaranteed coupon payments. there will be no capital gains tax for the acquireers of convertible debenture.Disadvantages of convertible debenturesIn case of bankruptcy, the debenture holder has a low precession claim on the companys asset as compares to the straight debt holders.The Valuation techniques for convertible debentures are a bit tricky and whitethorn require additional examen (Hanif, 2001) car park StockCommon stock is a long term security measure that is issued to the possessors of the company.Advantages of common stockCommon stock offer several advantages.Common stocks are liquid i.e. they can be easily and readily bought and sold.The encounter associated with common stock is very less as it is only limited to the initial cash investment made.T hey 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, suppliers, mentionors etc.The stock prices are usually unstable, that is they rise and fall quickly. So the investors are required to be sharp-sighted in this regard.Preference sharesPreference shares refer to those shares that offer a fixed percentage of dividends that is paid in preference to the common shares to the stock holders.Advantages of preference sharesThere advantages areIn preference shares the company is not forced to pay the dividends in the period when the scratchs 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 variant other instruments, they are not secured against the assets of the company.The interest yield on preference stock i s low as compared to the loan stockIn case of non-payment the preferred 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 soil property. One can choose between a fixed rate and adjustable rate mortgage depending upon ones risk bearing capacity, financial health and other requirements.Advantages of mortgageThe mortgage financing makes the borrowing flexible and affordable as it provides ownership of real estate along with the provision of financial aid.The interest rate on mortgage is tax free.The fixed schedule of mortgage payments allows you to plan up your cash flux and plan your needs and requirements accordingly.Disadvantages of mortgageThe default risk is high in case of mortgage.The mortgage terms and conditions requires for collateral to be penned as security. The lender has a right to claim on the security in case of default payments.Finance Strategy Finance simplified for you presidential term grants/loansGovernment grants are of great assistance to the entrepreneurs in terms of providing the financial hold up. Many of the political sympathies 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 process is involved, yet the process is much quicker than the other lenders. Like SBA (Small Business 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 gran tsThe element of bureaucracy is usually involved to approach for the grantsThe government organization giving the money, try to exert influence on the business counsel.The grantee is subjected to tougher terms and conditions in order to be eligible fot the grant.Retained ProfitRetained profit involves allocation of profit from an existing business to be reinvested in to the same business for the purpose of financing. This money can be used to buy new equipment, machinery, raw material and other such type of investments.Advantages of retained profitThis type of self financing helps the company to withstand any contingency requirements and uncertainties or even a calamity.The cost of raising 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 raging adventures may result in a loss.(Rajni and Hiro, 2008)Medium term sources of financeMedium term financing or intermediate financing is done for a period intermediate between 1 to 10 years. Medium term financing is generally done for the purpose of maintenance or up tier of the business like making improvements 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, funding up of working capital and or covering losses.Advantages of loans through loan, the financing is secured for the action of a loan. You can purchase a loan for almost everything now.Loan helps you to make things affordable.You can match the term of your loan to the life of an asset you want to purchase. For character you can take a loan of three years for a machine whose working life is three years.Disadvantages of loansIf you send packing 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 extra 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 efficient investment.They provide tax free dividendsOffer tax free capital growthDisadvantages of venture capital trustThe VCT investment mode has higher risk associations as compared to life insurance fund, collectives and other modes. The major(ip) risks areThe Unquoted companies (UK Smaller Companies)Liquidity issues (ability to sell shares)Market timing riskLeasingA lease in agreement 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 rental payments to the lessor.For example in the golf industry, the golf operators make use of leased 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 deposition of cash at the beginning.Leasing a property is much simpler as compared to mortgage financing. (Schmidgall, 2004)Disadvantages of leasingIn lease you flummox 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 i f a lessor is facing a downturn he is still supposed 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 in deceasement 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 amount at once.The cost of equipment under hire purchase is less as compared to leasing.They have detailed statutory controlDisadvantages of hire purchaseThe cost of maintenance is to be burnt by the hirer thus reducing 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 riskiness Lower (But 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 funds 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 small proportion of business angels turning out be devils, fulfilling their own motives rather than contributing into the good of the businessBusiness ang els, 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 goldbrick term financing. They provide a cash influx or the fulfillment of small 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 draftsBank 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 intere st for bank draft is higher than that for loans.Trade creditTrade credit is the easiest source of financing, where the suppliers of a business modify you to take up the material with the flexibility of making the payment later on. So whenever material equipments etc are taken without on-spot cash payment, trade 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 within 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) figureFactoring 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 genuine from the customer to the factor. 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 small number of invoices make the factoring 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 formed SBI Factors and mercenary services limited in confused 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 clients 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 responsibility 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 hold their time in planning elsewhereDisadvantages of invoice discountingTerminating the agreement can be difficult in case of invoice discountingDisputed invoices can sometimes pose a problem and should be carefully dealt with.ConclusionSo whether you are thinking of setting up a new business or extending the existing one, money will always be the first and the foremost requirement. One should always properly assess 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 set 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 thoroughly the appropriation of the resources in relation to the business. Investment readiness is always needed. A sozzled 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.