Types Of Industrial Finance

TYPES OF INDUSTRIAL FINANCE Short-term Finance Short-term finance is required for working capital needs of less than one year. This includes funds needed for variable, seasonal or temporary requirements. Banks are one the most important source of short-term finance where businesses can borrow funds as per their needs. Other sources include trade credit where businesses get credit period for purchases, installment credit for credit cards and customer advances where customers pay in advance for products or services. Short-term funds help businesses meet their day-to-day operational expenses in an organized manner. Medium-term Finance Medium-term finance refers to funds needed between 1 to 5 years usually for permanent working capital, small expansions, replacements, modifications etc. Some sources to arrange medium term funds are issue of shares and debentures to investors. Companies can also borrow from banks and financial institutions through term-loans which have repayment schedules between 1-5 years. Another important source is ploughing back of profits where businesses retain and reinvest their annual profits internally for future growth. Although shares are a long term source, debentures provide medium term funds to businesses. Long-term Finance Long-term funds from more than 5 years are essential for businesses to acquire fixed assets, establish new facilities, undertake substantial expansions or modernize operations. Key sources of long term finance include issue of equity shares and debentures to raise capital from public and investing it in long term assets & projects. Financial institutions like ICICI, IDBI, SIDBI etc provide long term loans against collateral to businesses. Internal accruals in the form of retained earnings over the years also contributes as long term finance for the company. #Corporate Securities Companies raise capital requirements by issuing different financial securities. There are two types - ownership securities and creditorship securities. Ownership Securities Also known as equity, are shares issued by companies to raise owners' capital. There are two main types of shares: Preference Shares Give preferential right to fixed dividend before common shares and preferential claims over assets in case of liquidation. Different types include cumulative, non-cumulative, participating and convertible preference shares. Equity Shares Represent proportionate ownership and residual claims over profits and assets. Equity shareholders have voting rights. Types are shares with and without differential voting rights. Creditorship Securities Represent borrowed capital or debt and include debentures and bonds issued by companies. Debentures Acknowledge a loan to the company and can be further classified as secured (mortgage) or unsecured (simple) debentures, registered or bearer, redeemable or irredeemable and convertible or non-convertible debentures. #Corporate Securities Market Exists for issuing and trading of securities post-issuance in secondary market. It has two components: Primary Market (New Issues Market) Concerned with initial public offering of securities to raise capital either by new or existing companies. Methods include public issue, rights issue, private placement, issue to employees etc. Secondary Market (Stock Exchange) Organized markets where existing securities are traded freely between investors through a network of stock brokers. Leading stock exchanges in India are BSE and NSE. Various intermediaries like merchant bankers, underwriters, brokers and depositor play an important role in marketing new issues. Underwriting ensures successful subscription by compensating issuer if public doesn't subscribe fully. It promotes mobilization of savings in capital markets. SEBI regulations have standardized underwriting process in India.