Sources of Finance Video Lecture | Business for A Level

sources of Finance once upon a time a
young man called Rahul wanted to expand
his business but he was confused how did
he raise the extra funds for his
business I know I'll ask grandpa for his
advice grandpa I plan to expand my
business but I am confused about the
various sources to raise funds hmm
nothing can beat retained earnings to
finance your business since it is your
own money you can save on interest and
principle repayment what is right what
is not grandpa can you please explain to
me in detail all right
retained earnings refer to the
undistributed profits from companies
which are usually kept in the form of
general reserve primarily it is a edge
against low profits in future and is
used for the issue of bonus shares by
the company but in effect it acts as an
important source of long term finance
for the companies with zero costs of
capital the retained profits can be used
for expansion and modernization programs
by the company's grandpa how do we
determine retained earnings the amount
of retained earnings is determined by
the quantum of profits the dividend
payout policy followed by the management
the legal provisions for dividend
payment and the rate of corporate taxes
etc retained earnings is an internal
source of Finance there are no flotation
costs involved in retained earnings
since it is the company's own finance
and hence does not involve the
uncertainties of external finance in
fact it is regarded as the most
dependable source of long-term finance
it also strengthens the firm's equity
base which enables to borrow at better
terms and conditions
what demerits of using our own funds the
main drawbacks of this source of finance
are it is fully dependent on the
accuracy of profits hence it is an
uncertain source for funds there is a
possibility of reckless use of funds by
the management excessive plowing back
may cause dissatisfaction among the
shareholders as they would get lower
dividends Rahul did not seem very
pleased with the idea of retained
earnings he wondered if there were other
sources that he could tap into he
decided to clear his doubts further
grandpa are there any other sources of
funds why yes
apart from retained earnings there is
trade credit create credit trade credit
refers to the credit granted to
manufacturers and traders by suppliers
of raw materials finished goods
components etc usually business
enterprises buy goods on 32
90 days credit this means that all the
goods are delivered to the purchaser but
payments are not made until the expiry
of the period of credit this type of
credit does not make the funds available
in cash but it facilitates purchases
without making immediate payments for
the same this is as good as funding of
the materials by suppliers for a certain
period this is a very popular source of
short-term finance who can avail of
trade credit trade credit is granted to
those customers who have reasonable
amount of financial standing and
goodwill in the market the volume and
period of credit extended depends on
factors such as reputation of the
purchasing firm financial position of
the seller volume of purchases past
records of payment and degree of
competition in the market terms of trade
credit may vary from one industry to
another and from one trader to another a
firm may also offer different credit
terms to different customers merits of
trade credit trade credit is a
convenient and continuous source of
funds create credit may be readily
available in case the creditworthiness
of the customers is known to the seller
businesses can buy now and pay later
which means even if they do not have the
immediate funds at their disposal they
can make purchases and pay later within
the stipulated time frame
trade credit does not create any charge
on the assets of the firm while
providing funds with trade credit the
business can focus on other areas such
as sales marketing and research in
immediate future D merits of trade
credit availability of easy and flexible
trade credit facilities may induce a
firm to indulge in over trading which
may turn out to be a risky proposition
there is a limit to the amount of funds
which can be generated through trade
credit it is generally a costly source
of funds as compared to most other
sources of raising money explanation for
the same is as follows a quick look at
utilization of trade credit by Walmart
Rahu did not seem very pleased with the
idea of retained earnings he wondered if
there were other sources that he could
tap into he decided to clear his doubts
further hello Rahul how are you doing
Mohan I need your help I want to expand
my business but I am confused about the
various sources of finance Rahul
factoring is a very popular source of
Finance but I am a bit busy
to explain the same to you in detail no
issues I am sure my grandpa would assist
me in the same next day Rahul decided to
gather some more information from his
grandfather grandpa my friend Mohan a
bank of our profession suggested me
factoring as one of the popular sources
of pie
can you please explain the same to me in
detail
sure why not my child
factoring factoring is a financial
option for the management of receivables
to stay simply it is conversion of
credit sales into cash in case of
factoring a financial institution factor
buys the accounts receivable of a
company client and pays up to 80 percent
of the amount immediately on agreement
the factoring company pays the remaining
amount balance 20 percent finance cost
minus operating cost to the client when
the customer pays the debt collection of
debt from the customer is done either by
the factor or the client depending upon
the type of factoring examples are
factoring against goods purchased
factoring for construction services
patterning against medical insurance
these are three parties directly
involved in factoring the one who sells
the receivable the debtor and the factor
the sale of the receivables essentially
transfers the ownership of the
receivables to the factor
thus the factor obtains the right to
receive the payments made by the debtor
for the invoice amount also he must bear
the loss if the debtor does not make the
payment once the rights live with the
factor seller should not make
collections from the debtor at times the
factor charges the seller a service
charge as well as interest based on the
wait period the factors overall profit
is the difference between the price it
paid for the invoice and the money
received from the debtor less the amount
lost due to non-payment let us take a
quick look at the benefits of factoring
additional services provided by factors
a quick look at additional services
provided by factors letters have a look
at the RBI guidelines for factoring
companies letters have looked at the
merits of factoring de merits of
factoring this source is expensive when
the invoices are numerous and smaller in
amount the Advanced Finance provided by
the factor firm is generally available
at a higher interest cost than the usual
rate of interest the factor is a third
party to the customer who may not feel
comfortable while dealing with it
factoring appeared on the Indian
financial scene only in the early 90s as
a result of RBI initiatives the
organizations that provide such services
include SBI factors and commercial
services limited can Bank factors
limited for most factors Limited State
Bank of India Canara Bank Punjab and
National Bank Allahabad Bank in addition
many non banking finance companies and
other agencies provide factoring
services that was so informative
I will surely try factoring thank you
hey I'm not done yet I have yet to tell
you about lease financing
a lease is a contract between the owner
of an asset the Lisa and its user the
lessee for the right to use the asset
during a specified period in return for
a mutually agreed periodic payment the
lease rentals the important feature of a
lease contract is separation of the
ownership of the asset from its usage
lease financing is based on the
observation made by Donald B grant why
own a cow when the milk is so cheap all
you really need is milk and not the cow
benefits of leasing
the leasing industry plays an important
role in the economic development of a
country by providing money incentives to
lessee the lessee does not have to pay
the cost of asset at the time of signing
the contract of leases leasing contracts
are more flexible so leases can
structure the leasing contracts
according to their needs for finance the
lessee can also pass on the risk of
obsolescence to the Lisa by acquiring
those appliances which have high
technological obsolescence today most of
us are familiar with leases of houses
apartments offices etc a quick looked at
various D merits of leasing
a quick look at various types of leases
all this is pretty interesting I have
also heard about public deposits but I
believe that only companies can issue
them you are right the deposits that are
raised by organizations directly from
the public are known as public deposits
rates of interest offered on public
deposits are usually higher than those
offered on bank deposits public deposits
can take care of both medium and
short-term financial requirements of a
business the deposits are beneficial to
both the depositor as well as to the
organization while the depositors get
higher interest rate than that offered
by banks the cost of deposits to the
company is less than the cost of
borrowings from banks companies
generally invite public deposits for a
period up to 3 years the acceptance of
public deposits is regulated by the
Reserve Bank of India the public
deposits are regulated by the provisions
of the Companies Act and the company's
acceptance of deposit rules 1979
a quick look at various merits of public
deposits
a quick look at various demerits of
public deposits
a quick look at a few infamous scams
there is one more sauce that should
interest you commercial paper
commercial paper is an unsecured and
discounted promissory note issued to
finance the short-term credit needs of
large institutional buyers banks
corporations and foreign governments
commonly use this type of funding an
unsecured short-term debt instrument
issued by a corporation typically for
the financing of accounts receivable
inventories and meeting short term
liabilities a quick looked at commercial
paper in India
you
merit of commercial paper
demerits of commercial paper
tax about commercial paper which may
interest you Thank You grandpa you have
provided me with invaluable information
now I know so much more about the
sources of Finance remember there is no
such thing as a perfect source of
Finance each source has its own merits
and flaws what is important is the risk
taking ability of the management
circumstances prevailing at that point
of time and of course the need for
finance Thank You grandpa that is so
true