Types of Financing – CA Inter FM Notes is designed strictly as per the latest syllabus and exam pattern.
Types of Financing – CA Inter FM Notes
1. Types of Finance on the Basis of Term:
- Long-term Finance: Finance for a period exceeding 5-10 years.
- Medium-term Finance: Finance for a period exceeding one year but not exceeding 5 years
- Short-term Finance: Finance for a short period of time not exceeding one year.
2. Long-Term Sources of Finance:
(a) Equity Capital: Issue of Equity share shares is primary source of long term finance.
(b) Preference Share Capital: Company can issue preference shares to fulfil its long term requirement of funds. Preference shareholders receive fixed payment of dividend and priority towards repayment of capital.
(c) Retained Earnings: Company can retain and invest some portion of its profit.
(d) Debentures: Company can issue non-convertible, fully convertible or partly convertible debentures to arrange long term funds.
(e) Bond: Company (Govt, or PSU) can raise long term funds through issue of Bond.
3. Types of Call Bond:
- Callable bonds: Issuer can redeem bond before maturity at prefixed call price.
- Puttable bonds: Investor can get its money back before maturity.
4. Name of Foreign Bonds:
- Foreign Currency Convertible Bond (FCCB)
- Plain Vanilla Bond
- Convertible Floating Rate Notes (FRN)
- Drop Lock Bond
- Variable Rate Demand Obligations
- Yield Curve Note (YCN)
- Yankee Bond
- Euro Bond
- Samurai Bond
- Bulldog Bond
5. Indian Bonds:
- Masala Bond
- Municipal Bonds
- Government or Treasury Bonds
6. Bridge Finance:
Under bridge finance bank provides short term loan to a company (which has pre-approved term loan) to fulfil requirements of funds upto date of sanction of term loan.
7. Venture Capital Financing:
Financing of new high risky startups by talented and qualified entrepreneurs who lack experience and funds to shape their ideas into a successful business.
8. Characteristics of Venture Capital Financing:
- Equity finance in new companies.
- Long-term investment in growth-oriented small or medium business firms.
- Provides managerial support also.
9. Methods of Venture Capital Financing:
- Equity Financing: Financial institute purchase equity of business but not more than 49% of the total equity capital of venture capital undertakings.
- Conditional Loan: In case of conditional loan 2-15 per cent royalty is payable instead of interest.
- Income Note: It is a combination of normal loan and conditional loan.
- Participating Debenture: During first phase no interest is charged, during second phase a low rate of interest is charged and in last phase a high rate of interest is charged.
10. Debt Securitisation:
It is a process of conversion of existing loans of financial institutions into securities. Existing car loans, credit card etc. are transferred to special purpose vehicle (SVP), who convert these loans into securities and sold these securities to pension fund, provident fund etc.
11. Lease Financing:
Under lease financing asset is purchased by the investor viz. lessor and provide these asset to user viz lessee who pays a specified rent at periodical intervals.
12. Types of Lease Contracts:
- Operating Lease: Under this lease contract lessee gets right to use the asset for small period and ownership and risk related to asset remains with lessor.
- Financial Lease: Under this lease contract lessee gets right to use the asset for long period (generally full economic life of asset) and ownership and risk related to asset remains with lessor.
13. Other Types of Leases:
- Sales and Lease Back: Legal owner of asset sells asset to second party after this transfer second party leases back it to first party.
- Leveraged Lease: Buyer of assets purchases asset against loan (approximately 80% loan) and provides asset to a party on lease. In return lessee pays installment of loan on behalf of lessor and small amount of rent to lessor.
- Sales-aid Lease: Lessor promotes asset of any manufacturer through his own leasing operations and gets commission from manufacturer and rent from lessee.
- Close-ended and Open-ended Leases: Under close-ended lease, lessee has to transfer asset to lesser at the end of lease tenure while under open-ended lease, the lessee can purchase asset at the end of lease tenure.
14. Short-Term Sources of Finance:
- Trade Credit
- Accrued Expenses and Deferred (Unearned) Income
- Advances from Customers
- Commercial Paper
- Treasury Bills
- Certificates of Deposit (CD)
- Bank Advances through:
(a) Short Term Loans
(c) Clean Overdrafts
(d) Cash Credits
(e) Advances against goods
(f) Bills Purchased/Discounted
- Financing of Export Trade by Banks:
(a) Pre-shipment finance Le., before shipment of goods.
(b) Post-shipment finance Le., after shipment of goods.
- Inter Corporate Deposits
- Public Deposits
15. Types of Packing Credit:
- Clean packing credit: Under this type of credit exporter gets credit by just showing confirm export order or letter of credit. There is no charge or control of bank over raw material or finished goods.
- Packing credit against hypothecation of goods: Under this type of credit goods are hypothecated.
- Packing credit against pledge of goods: Under this type of credit the possession of the goods lies with the bank.
16. Other Sources of Financing:
- Seed Capital Assistance
- Internal Cash Accruals
- Unsecured Loans
- Deferred Payment Guarantee
- Capital Incentives
- Deep Discount Bonds
- Secured Premium Notes
- Zero Interest Fully Convertible Debentures
- Zero Coupon Bonds
- Option Bonds
- Inflation Bonds
- Floating Rate Bonds
17. International Financing:
- Commercial Banks
- Development Banks
- Discounting of Trade Bills
- International Agencies
- International Capital Markets
- Euro Issues by Indian Companies
- Financial Instruments:
(a) External Commercial Borrowings (ECB)
(b) Euro Bonds
(c) Foreign Bonds
(d) Fully Hedged Bonds
(e) Medium Term Notes (MTN)
(f) Floating Rate Notes (FRN)
(g) Euro Commercial Papers (ECP)
(h) Foreign Currency Option (FC)
(i) Foreign Currency Futures
(j) Foreign Euro Bonds
(k) Euro Convertible Bonds
(l) Euro Convertible Zero Bonds
(m) Euro Bonds with Equity Warrants
18. American Depository Receipts (ADRs):
If any non-US company wants to sell its securities on New York Stock Exchange then it can be done by issuing ADR. One unit of ADR represents a certain number of a company’s regular shares. Non-US Company has to deposits its original shares with custodian bank of US and against these deposited shares ADR will be issued.
19. Global Depository Receipts (GDRs):
When a company wants to issue its shares in foreign country then it can be done by issuing GDR. One unit of GDR represents a certain number of a company’s regular shares. Company who wants to issue its shares has to deposits its original shares with custodian bank of foreign country and against these deposited shares GDR will be issued.
20. Indian Depository Receipts (IDRs):
If any non-Indian company wants to sell its securities in Indian capital market then it can be done by issuing IDR. One unit of IDR represents a certain number of a company’s regular shares. Non-Indian Company has to deposits its original shares with Indian custodian bank against these deposited shares IDR will be issued.