Page 59 - DMGT207_MANAGEMENT_OF_FINANCES

Management of Finances

Notes 3.8 Summary

 Financial needs of a business: The financial needs of a business may be grouped into three
categories which are Long-term, Medium-term and Short-term financial needs.

 Long-term Sources of finance of a business include Share capital, Debentures/Bonds of
different types, Loans from financial institutions and Venture capital funding.

 Short-term Sources of finance includes Trade credit, Commercial banks, Fixed deposits for
a period of 1 year or less, Advances received from customers and Various short-term
provisions.
 In recent times in India, many companies have raised long-term finance by offering various
instruments to public like deep discount bonds, fully convertible debentures, etc.
 In India, specialized institutions provide long-term financial assistance to industry.

 Bridge finance refers to loans taken by a company normally from commercial banks for a
short period, pending disbursement of loans sanctioned by financial institutions.
 CP is a source of short-term finance to large firms with sound financial position.

 The venture capital financing refers to financing of new high risky venture promoted by
qualified entrepreneurs who lack experience and funds to give shape to their ideas.

 A lease is a contractual arrangement under which the owner of an asset agrees to allow the
case of its asset by another party in exchange of periodic payments (lease-rental) for a
specified period.
 The seed capital assistance is interest free but carries a service charge of 1% for the first five
year and 10% p.a. thereafter.

3.9 Keywords

Commercial Paper: It represents a short-term unsecured promissory note issued by firms that
have a fairly high credit (standing) rating.
Income note: It is a hybrid security, which combines the features of both conventional loan and
conditional loan.
Inter-corporate Deposits (ICDs): A deposit made by one firm with another firm is known as
Inter-corporate Deposits.

Retained Earnings: These are the portion of earning available to equity shareholders, which are
ploughed back in the company.

Trade Credit: It refers to the credit extended by the supplier of goods or services to his/her
customer in the normal course of business.

3.10 Review Questions

1. Explain the advantages of equity financing.
2. What are the advantages of debt financing from the point of the company and investors?
3. What do you mean by venture capital financing and what are the methods of this type of
financing?

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