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Financial Support

Funds are lifeline of any business and its continuous supply will ensure its continuous growth and survival. The funds are invested in the physical resources i.e. land, buildings, machines, equipments, raw materials, etc which are used by the enterprise in production and marketing process. In other words, these funds are a pre-requisite for mobilisation of the real resources of the business. An enterprise needs regular and proper financial support at every stage in order to grow and sustain the business.

A Company can raise capital from various sources like issue of securities and borrowings from different agencies. The lenders of funds include individual investors, institutional investors, banks and special industrial financial institutions. The borrowers and lenders are brought together through the financial markets i.e. the money and capital markets.

Thus, a company can meet its financial requirements through various means.

Stock Market

Stock market or securities market is a market where securities issued by companies in the form of shares, bonds and debentures are traded and can be bought and sold freely. It consists of primary market and secondary market.

Primary market

Private market or the new issues market is the market which is concerned with the issue of new securities. Companies often raise funds through the primary market for setting up or expanding their business. The various methods through which capital can be raised are:-

• By prospectus
  Capital can be raised from the general public by the issue of prospectus. The prospectus is an invitation to the general public for subscribing to the capital. It contains various details regarding the particulars of the company, its financial position, etc.
  
  
• By Private placing
  Shares are sold to individuals or institutions directly by making a private arrangement with them.
  
  
• By offering rights issue
  Companies may also raise capital from the existing shareholders by making a rights issue. Under the rights issue, the shareholders have the right to a certain number of shares in proportion to the shares held by them.

Secondary market

or stock exchange is a highly organised market for the purchase and sale of second hand listed securities. It is an association, organisation or body of individuals, whether incorporated or not, established for the purpose of assisting, regulating and controlling business in buying, selling and dealing in securities.

The various instruments of stock market include:

• Shares, which represents the interests or rights of the investors (measured in terms of money) to participate in the profits made by the company while it is a going concern, or in the assets of the company when it is wound up
  
  
• IPOs or Initial Public Offerings is the first sale of a company's common shares to public investors for the purpose of raising capital in the primary market
  
  
• Mutual Funds is a mechanism of mobilizing the savings and resources of various individual investors, especially small investors and investing them in shares and securities of the companies
  
  
• Bond is a security representing a long-term promise to pay a certain sum of money at a certain fixed time or over the course of the loan, with a fixed rate of interest payable to the bond holder.

Deposits

Public deposits are an important source of financing the medium-term and long-term requirements of a company. The term 'public deposit' implies any money received by a company through the deposits or loans collected from the public. The public includes the general public, employees and shareholders of the company but excludes the money received in the form of shares and debentures. The deposit are raised for a maturity period of 3 years and can be renewed or paid , thereafter. The public deposits are regulated by the provisions of the Companies Act 1956 and the Companies (Acceptance of Deposit) Rules, 1975. In India, this method of raising finance has gained a lot of importance because of the several advantages relating to public deposits:-

• It is an easier method of mobilising funds, especially during periods of credit squeeze.
  
  
• The administrative cost of deposits for the company is lower than that involved in the issue of shares and debentures.
  
  
• The rate of interest payable by the company on public deposits is lower than the interest on loans from banks and other financial institutions. Such an interest is a tax deductible expense.
  
  
• It helps the company to borrow funds from a larger segment of public and thus reduces the dependence of the company upon financial institutions.
  
  
• It also enables the company to create contact with a large number of investors.
  
  
• It ensures the availability of funds for a longer duration and provides flexibility to the financial structure of the company. There is no risk of over-capitalisation and the deposits can be repaid when they are not required.
  
  
• There is no dilution of shareholders' control as the depositors have no voting rights and cannot interfere with the internal management of the company.

But this mode of financing through public deposits has its own limitations:

• As the public deposits are more likely to be affected by the uncertain conditions in the economy, the depositor’s response may vary accordingly. They may also tend to withdraw their deposits if the company is not performing well.
• Failure by several companies to pay their deposits has also effected the credibility of this source of fund raising.
• Professional investors may not like to invest in such deposits as there is no or less chance for capital appreciation.
• As public deposits are unsecured, the depositors may have to bear the risk of loss of money in the event of failure of the company.

Regulating Public Deposits

Ploughing Back of profits

'Ploughing back of profits' is an important source of internal or self financing by a company. Profit, which are not distributed as divided by the companies to its shareholders and are ploughed back as reserves can also be used as source of financing business needs. This may be regarded as reinvestment of profits. As these retained profits actually belong to the shareholders of the company, these are treated as a part of ownership capital. Retention of profits is a sort of self financing of business. These reserves may be utilised by the company for the following purposes:-

• For expansion and growth of the business
• For strengthening the financial position of the company
• For meeting various working capital requirements of the company
• For redemption of old debts
• For replacement of obsolete assets and modernisation.

Arranging funds through this method reduces dependency on funds from external sources in order to finance their regular business needs

The amount of retained earnings in a company depends upon the following factors:

• The amount of net profits is an important determinant of internal savings. Higher the net profit earned by a company, the greater is its capacity to plough back profits.
  
  
• The dividend policy of a company determines the extent to which the profits can be retained for reinvestment in the business. If a company follows a liberal and regular dividend policy, it may end up retaining lesser profits. But if it follows a conservative dividend policy, it has a chance of building up greater internal savings.
  
  
• Another factor is the rate of corporate tax imposed on the company. If the rate is high, then it may have lesser amount of internal savings.
  
  
• The age of a company also influences this amount. New companies are generally unable to retain much profit due to their desire to satisfy the shareholders. While the old companies may distribute smaller portion of their profits to shareholders and thus retain a larger amount of internal savings.
  
  
• The future plans of the company regarding modernisation and expansion also affects the amount of retained earnings.

Benefits of ploughing back of profits are

• A company with such reserves can face unforeseen contingencies; capital market crisis and other downturns in the economy with lesser difficulty and ease.
• Such reserves help to stabilise the dividend policy of the company. It thus helps in improving the company's relations with its shareholders. It even helps in appreciating the value of its shares.
• It is the most convenient and economical method of finance and involves no legal formalities or negotiations.
• It helps to keep the financial structure of the company fully flexible and even increases the credit-worthiness of the company.

Issue of Debentures

Companies generally have powers to borrow and raise loans by issuing debentures. Debentures are instruments, which acknowledge debt, the rate of interest payable on debentures is fixed at the time of issue and are secured by a charge on the property or assets of the company. The company is liable to pay interest even if there are no profits. Debentures are mostly issued to finance the long-term requirements of business and do not carry any voting rights. The company can also issue debentures , which can be converted into equity shares instead of redeeming the same.

Loans from Financial Institutions

In India, there are large number of financial institutions like the Industrial Finance Corporation of India, Industrial Credit and Investment Corporation of India (ICICI) , State level Industrial Development Corporations, etc, which are established to finance long-term and medium-term loans requirement of business. These financial institutions grant loans for a maximum period of 25 years against approved schemes or projects. Loans agreed to be sanctioned must be covered by securities by way of mortgage of the company's property or assignment of stocks, shares, gold, etc. The basic criteria of loan is the background of the owners and business prospects

Loans from Commercial Banks

In India, there are about --- nationalized and ---- private banks that provide short, medium term loans against the security of properties, assets and in some cases, against the personal guarantees of the Directors or owners. It is also possible to negotiate interest rate for borrowing funds from these banks. Basically, the funds can be borrowed for meeting working capital requirement, undertaking export & import transactions or undertaking for modernisation and renovation of assets. This method of financing does not require any legal formality except that of creating a mortgage on the assets.

Non Banking Financial Companies (NBFC)

Apart from Banks and financial institutions, a large number of Non Banking Financial Companies also provides medium and long term funds assistance to businesses. These companies alike Banks provide funds based on the size of the security provided and business prospects, the interest rate is not fixed and can be negotiated easily. There are various types of NBFC like financing NBFC, leasing & hire purchase NBFC, which meets the fund requirements of business based on their nature. Manufacturing companies can secure long-term funds from leasing companies.

Following options can be explored for meeting short term funds

Bank Credit

Commercial Banks play an important role in financing the short-term requirements of business concerns. They provide finance in the following ways:

• Cash credit
  It is the most popular method of financing by commercial banks. When a borrower is allowed to borrow up to a certain limit against the security of tangible assets or guarantees, it is known as secured credit but if the cash credit is not backed by any security, it is known as clean cash credit. In case of clean cash credit the borrower gives a promissory note which is signed by two or more sureties. The borrower has to pay interest only on the amount actually utilised.
  


• Overdrafts
  Under this, the commercial bank allows its customer to overdraw his current account so that it shows the debit balance. The customer is charged interest on the account actually overdrawn and not on the limit sanctioned.

Trade Credit

It is the credit which the firms get from its suppliers. It does not make available the funds in cash, but it facilitates the purchase of supplies without immediate payment. No interest is payable on the trade credits. The period of trade credit depends upon the nature of product, location of the customer, degree of competition in the market, financial resources of the suppliers and the eagerness of suppliers to sell his stocks.

Factoring

The amounts due to a company from customers, on account of credit sale generally remain outstanding during the period of credit allowed i. e. till the dues are collected from the debtors. There are various agencies called as factoring agencies, which purchases the book debts of business at certain discount on cash payment. After the sale, the responsibility of collecting the debtors' balance is taken over by these factoring agencies. This source of raising funds is currently not much popular in India due to presence of small number of factoring agencies.

Discounting Bills of Exchange

This method is widely used by companies for raising short-term finance. When the goods are sold on credit, bills of exchange are generally drawn for acceptance by the buyers of goods. Instead of holding the bills till the date of maturity, companies can discount them with commercial banks on payment of a charge known as bank discount. The rate of discount to be charged by banks is prescribed by the Reserve Bank of India from time to time. The amount of discount is deducted from the value of bills at the time of discounting. The cost of raising finance by this method is the discount charged by the bank.

Instalment Credit

Firms may get credit from equipment suppliers. The supplier may allow the purchase of equipment with payments extended over a period of 12 months or more. Some portion of the cost price of the asset is paid at the time of delivery and the balance is paid in a number of instalments. The supplier charges interest on the instalment credit which is included in the amount of instalment. The ownership of the equipment remains with the supplier until all the instalments have been paid by the buyer.

Check out:

1.Indian Banks

2.Foreign Banks in India.

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