External Financing - India’s five year plans, Indian Economy Video Lecture | Indian Economy - B Com

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today we are going to explain external
sources of finance
external sources of Finance are those
sources of finance which come from
outside the business for example
retained earnings are an internal source
of Finance whereas bank loan is an
external source of Finance we can
segregate external sources of funds
between long term sources of finance and
short term sources of finance
long-term sources of external finance
our equity shares preferred stock
debentures term loan venture capital
leasing and higher purchase
short-term sources of external finance
are bank overdraft trade credit
factoring of debt
equity shares equity shares are a common
source of finance for big companies not
all the businesses can use this source
as it is governed by a lot of
legislations a key feature of equity
share is the sharing of ownership rights
and therefore the current shareholders
rights are diluted to some extent it is
considered costly compared to debt
financed because the return in the form
of a dividend or bonus shares offered to
shareholders is not tax deductible
debentures debentures are another common
means of finance used by companies who
prefer debt over the equally debt is
considered to be the cheaper mode of
finance compared to equally it does not
share control with investors it is
because the interest paid to Deb and
tour holders is tax-deductible rest of
process of debentures issue is similar
to equally issue it is offered to the
common public and therefore necessary
legislations need to be complied with
debentures also involve some cost of
issuing and they are collateralized by
some assets of the company
term loan the characteristics of a term
loan is very similar to debentures
except that it does not include too much
cost of issuing because it is given by
some bank or financial institutions the
common public is not involved in it a
rigorous analysis of company's
financials and future plans is done by
the bank to judge the debt servicing
capacity of the company these loans are
also secured by some assets
preferred stock the preferred stock
shares characteristics of both common
equity stocks and debt they are called
preferred because they have got priority
over common equity shares in terms of
payment of dividend and the capital also
at the time of liquidation a special
kind of preferred shares called
cumulative preference shares has its
dividend accumulated till it is not paid
the payment of such dividend can be
delayed but cannot be ignored
venture capital it is same as equity
shares except that the investors are a
different set of people commonly known
as venture capitalists they normally
invest in a new company at an initial
stage and do a rigorous analysis of a
company before investing venture
capitalists exit the firm once it starts
getting a good valuation
leasing and higher purchase choosing
higher purchase or lease as an option
over paying the full amount to the
supplier of goods can help businesses
delay its cash payment which is equal to
having its goods financed normally the
higher purchase option is provided by
suppliers of big machinery or Bank
becomes an intermediary at times both
lease and hire-purchase provide the
buyer with an option to purchase the
asset at the end of its term
short-term sources of finance our bank
overdraft it is a simple mode of
short-term financing businesses need
money for their day-to-day requirement
which arises due to a time gap between
their collections and payments to
fulfill such requirements bank overdraft
is an ideal short-term source of finance
trade credit trade credit is nothing but
the credit given to a business by their
creditors or suppliers it allows a
business to delay its payments by some
period the period of credit depends on
the credit terms between the business
and the suppliers
factoring of debt it is an arrangement
whereby the business sells its account
receivables or debtors at a discount in
this arrangement the buyer who is known
as the factor collects the money from
the debtors on behalf of the business
and charges a premium for the service if
the debtor does not pay for any reason
the factor can get back to the business
for the payment
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