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Short medium and long term sources of finance

A share indicates a smaller unit into which the overall requirement of capital of company is subdivided.

For example if the capital required by a company is Rs 10 crores it can be subdivided into 1 crores smaller unit called as shares each one of the unit having the value of Rs 10 each which is technical word is referred to as face Value or nominal Value. In the indian Circumstances the face Value of Nominal Value can be decided by the company on its own Generally found face value of nominal value is Rs 10 or Rs 10 each. In indian circumstances a company can raise the long term fund by issuing two type of shares.

Equity share Preference share Equity Share These are the corner stone of financial structure of the company.

On the strength of these shares the company procures other source of capital. Equity share as a source of long term funds for the company has the following characteristic features Investor in the equity share are the real owner of the company.

As such the investor in equity shares are entitled to the profit earned by the company or any loss incurred by the company. Fund raised by the company in the form of equity share are not required to be repaid during the lifetime of the company. Preference Shares These are the shares which enjoy preferential treatment as compared to the equity share in respect of the following factors: Unlike in case of equity shares the preference shares carry the dividend at a fixed rate which is payable even before any dividend is paid on equity shares.

In the case of winding up of the company preferences shareholders are paid back their investment even before the investment of equity shareholders. Preference share follow the following characteristic Investor in preference share are not the absolute owners of the company. Funds raised by the company by way of preference share are required to be repaid during the existence of the company.

Sources of Short-Term and Long-Term Financing for Working Capital

As per the provision of section 80 of the companies Act the company can issue the preference share maximum for the duration of 20 years.

Like in case of equity shares funds raised by the company by way of preference shares are available to the company on unsecured basis ie the company does not offer any of its assets by way of security to the investor in preference shares. As compared to equity share risk on the part of company is more in case of preference share. DEBENTURE It contain a document an acknowledge of responsibilty issue by a company and promise to repay the debt at specified date or at the option of the company and pay teh interest at fixed rate and at regular interval known as debenture.

Characteristic of debenture The person who invest the money in form of debenture is the creditor they are not the investor of the company. The money which the company raised from outsiders in the form of debenture are required to be repayed by th company during the life time of the company. Debenture are generally secured ie the company offer some of the asset as security to the investor in debenture.

The fund raised by the company in the form of debenture is risky where as risk on the part of investor is very less. TERM LOAN indicates liabilities accepted by the company which are for the purpose of purchasing the fixed assests and are repayable over the period of 3 to 10 years. They are given by banks or financial institution.

According to source of Finance

Features of termed loan Banks or financial institution granting the term loans are not at all owners of the company. Terms loan are required to repaid during the life span of the company. It may be secured or unsecured though normally all the term loan ar secured. Return on term loan are in the form of interest. Term loan as a source of raising long term funds is very risky form the company point of view.

Risk on the part of bank or financial institution is very less in termed loan.

Raising the funds in the form of public deposits is more easy then borrowing fund from bank or financial institutions. The rate of returns payable in public deposits is very less as compnare to bank or financial institution. It is form of unsecured borrowing for the company. In the situation where bank grasp credit facility public deposits played very important part. Under the leasing agreement the company acquires the right of long term financing.

It is written agreement between the owner of the assets called the lessor and the user of the asset called the lessee. In it the lessor agree the lessee to economically use the asset for a specific period of time but the title of the asset is retained by the lessor.

This economical permitted by the lessor on the lessor on the payment of periodical amount which is in the formof lease rent. It is an important agreement document in any leasing activity as it start the legal relationship between the lessor and lessee. Advantages of leasing Risk of ownership: Saving of Capital outlay: Leasing enables lessee to make full use of the asset without making immediate payment of the purchase price. It indicate whatever profit earned by the company are not distruted among its shareholders in the form of dividend but are kept aside for being used in future fojr expansion of the firm.