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Sources of Finance
Mahesh Amarasiri
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Objectives
Identification and evaluation of alternative
sources of finance
Importance of ownership to the financing of a
business
When and for what reasons a bank loan might
be available
Other ways of borrowing money
The variety of grants that are available
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Sources of
Finance
GovernmentAids
Business Owners
Borrowing fromthe Banks
Other ways ofborrowing
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Sources of
Finance
GovernmentAids
Business Owners
Borrowing fromthe Banks
Other ways ofborrowing
1. Who needs money
2. Business Finance
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Discussion
Who needs finance?
Where do we get the money from?
Own money
Borrowing
Grants
earnings
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Business Finance
Own Money
Borrowings
Grants Venture capitals
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Sources of
Finance
GovernmentAids
Business Owners
Borrowing fromthe Banks
Other ways ofborrowing
1. Classifying Businesses2. Financing Companies
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Classification of Business
Identify the businesses you are aware of
Classify the business ( eg :Trading,
Manufacturing, Service etc)
Classify according to the size
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Ownership of business
Sole Trader
Partnerships
Companies
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Understanding company operation
Company formation
Share issues and voting rights and ownership
Company engage in transactions Profit sharing
Liabilities towards external debt
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General Terms in Financing
Capital
Initial cash investment
Assets transfer to the business
Asset
Owned by the business
Liability
Loan/ payable owed by the business
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Activity
Cash in the bank
Computer
An amount owed to a hire purchase company
Rented building
Factory full of machinery
An employee
Profits made in the previous years but notpaid out to
shareholders
A tax bill
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Sources of
Finance
GovernmentAids
Business Owners
Borrowing fromthe Banks
Other ways ofborrowing
1. Banks
2. Borrowing Money
3. Why Borrow
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Banks
Stores the wealth
Payment mechanism ( eg : Cheque/ SLIPS)
Lending Financial Intermediaries
Foreign Currency
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Activity
If you have Rs.1,000,000 and if you can lend it
to a somebody at 15% interest rate, what
other information you require
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Borrowing Money from the Banking
Sector
Credit worthiness
Ability to repay
Ability to generate profits ( bank) Purpose
Owners commitment
security
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Why borrow?
Acquisition of a business
Completely new business
Expansion of the existing business
Capital finance
Short-term ( Eg : computer system)
Long term ( Eg : Building)
Working capital finance
Example
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Sources of
Finance
GovernmentAids
Business Owners
Borrowing fromthe Banks
Other ways ofborrowing
1. Factoring
2. Invoice Discounting
3. Leasing
4. Hire Purchase
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Factoring
Reasons
Growth of Credit sales
Long duration of credit
Factoring company overtakes the debtor ( as
a security) and provide money to the client
Sometimes the Factor provides the debt
collection service as well.
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Invoice Discounting
One off deals
High risk
Only for the reputed clients
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Leasing
Lessor : owns the asset, grant the right to use
the asset
Lessee :
does not own the asset, but uses it
Makes the payment to the lessor
Operating Lease vs Finance Lease
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Operating Lease vs Finance Lease
Operating Lease
Short term : Less that the assets life time
Similar to renting
At the end of the period lessor has two option Release the
asset
Sell at the second hand value
Finance Lease
Lessor Financing and owns the assets Lessee uses and maintains
the assets while paying
Lessor gets the capital allowance
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Why Leasing ?
Paid in full Free from all the financing mattersSupplier
Pays the supplier and owns the assets
Fund the assets
Earns periodic payments from LesseeLessor
Do have to invest upfront
Difficulty of obtaining bank loans
Cost of financing is lower compared tobank loan
Lessee
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Hire Purchase
Business Purchases goods on credit and pays byinstallments
Three parties are involved Vender
Finance Company Customer
HP agreement between finance company and customer
Involves a upfront payment ( contrast with a finance lease)
Ownership transfer at the end of the period
Business get the Capital Allowance
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Activity : Cost of financing
What are the costs involved in
Bank loan
Factoring
Discounting
Leasing
Hire Purchase
Issuing shares
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Activity : Reason to borrow money
Factoring and Invoice Discounting
Leasing and Hire purchase
