SOURCES OF FINANCE

CA SNEHAL KAMDAR
‐ SENIOR PARTNER
1
M/S JAIN JAGAWAT KAMDAR & CO.
Almost half of all ventures fail because of poor
financial management
‐Dun & Bradstreet

2
Case
Study

3
Parameters for choosing the right source of finance

•Amount of Money
required
•Cost of Fund

•Tenure

•Security cover available

•Risk Profile of Borrower

•Prevalent Economic
Conditions
4
 Sources of
Finance

• Short
Term

• Long
Term

5
 Sources of Short Term
Finance

• Working Capital by
Banks
• Factoring
• Commercial Paper
• Inter Corporate
Deposits
• Private Finance
• Peer to Peer Lending

6
 Working Capital Finance by
Banks
• Options:‐

 Cash Credit / Overdraft / WCDL

 Purchase/ Sale Bill Discounting

 Letter of credit

 Bank Guarantee

 Buyer’s Credit

 Warehouse receipt funding

 Commercial paper 7
 Cash Credit/ OD /
WCDL
 Borrower is allowed to borrow up to certain
limits against the security of Current assets.
 Interest is charged on the amount actually
utilised . (Base rate + 1 % ‐ 4 % spread)
 Security Margin : Stock ‐ 25 ‐ 30 %
Book Debts ‐ 25 – 40 %
 Current Assets Levels : RM ‐1 to 3 m
WIP – Process Cycle FG – 1 to 2 m
Book Debts – 3 to 4 m

8
 Ratios :
Current Ratio – Min ‐ 1.25 , Desired – 1.33
TOL /(Adj) TNW – Max ‐ 3 , Desired ‐ 2
Interest Coverage ‐ Min – 2
 Rating :
External ‐ Min – BB+ Or Equivalent
Internal ‐ Min – 4 & above (40 %)
CIBIL – Clean for Co. & Directors
 Collateral : 10% onwards
 Forms / Reports :
Annual – CMA & AR
Monthly – Stock & Book Debts Stat Qtrly ‐ Production &
Performance Data Hly – Budget & Performance Data
 Inspection & Audit : At least once a year

9
 Purchase/ Sale Bill Discounting

 Under this Bank takes the Bill drawn by borrower

on his (borrower's) customer.

 Bank pays after deducting discount/ Interest &

commission.

 The Bank presents the Bill to the borrower‘s

customer on the due date and collects the total
amount.

 If the bill is delayed, the borrower or his customer

pays the Bank a overdue interest.

10
 Bills
Discounting
 Constitutes a vital part of the working capital
finance and is a major Trade Finance activity.

 Bills can be clean or backed by L/C.

 Liability in case of dishonor of the bill shifts,

depends on recourse terms .

11
 Letter of Credit
(L/C)
 Issued by a bank at the request of an
Purchaser.
importer/
The bank promises to pay an
presentation of documents
exporter/Seller, upon specified in the L/C.
An L/C reduces the risk of non fulfillment because
the bank agrees to pay against documents.
The L/C can be sight or Usance (30 ‐180 days).
The L/C must contain a specified validity date
and stated maximum amount .

12
 Issuing Bank

The relationship The relationship between

between the issuing the importer and the
bank and the exporter issuing bank is governed
is governed by the by the terms of the
terms of the letter of application and agreement
credit, as issued by for the letter of credit
that bank. (L/C).

Beneficiary Applicant
(exporter) (importer)

The relationship between the

importer and the exporter is
governed by the sales contract.

13
 Bank
Guarantee
• Type of Guarantees :

Advance Payment BG

Performance BG

Others – to Govt. Dept.

• Tenure – 3 to 36 Months

• Margins – 5 to 100 %

14
 Buyer’s
Credit
 Short term credit availed by an importer(buyer).

 Availed from overseas lenders ‐ banks and financial

institutions.
 Helps importers gain access to cheaper foreign funds
closer to LIBOR rates.
 Normally it is quoted as “3M Libor + 100 bps”

15
 Buyer’s
Steps Involved:‐Credit
Customer will import the goods either under
LC, or Direct document.

Requests the Credit Arranger to grant the credit.

Overseas bank branches to provide a buyer's credit

offer letter.
On receipt of LOU / LOC Overseas bank to fund
Importer's bank Account or pays the supplier’s bank
directly.

Importer's bank will recover and remit the same to overseas

bank on due date. 16
 Buyer’s
Credit
 In India, buyer's credit tenure is :
3‐12 months for RM imports
1‐3 Yrs for Capital Goods
 Every 3/6 months, the interest on buyer's
credit may get reset.
 The exporter gets paid on due date.
 The currency of imports can be different from
the funding currency.

17
 Factorin
g
An agreement in
which receivable
arising out of sale
are sold by borrower
to the financial
interdiary at a
discount

Factor is
Factor usually make concerned
more
advances 80‐ creditworthiness
with the
90% of value
upto the party invoiced
accounts
of than clients
of
receivable. financial status

18
 Sales Contract/
Purchase Order
Seller/ Shipment/ Invoicing (
Buyer/
Your Self Bill of Exchange,
Debtor
Promissory Note
as
Applicable)

n
Collectio
Paymen
Factor t
Assignment
(Financial
of Invoice
Intermediary)

19
 Factorin
Advantages
g Disadvantages

•Clean credit •Not available for

•Focus on Core Areas
Small Customers
•It is the quickest way to
get cash after sale. •May harm
•Cost effective with the cut customer
in invoice processing and relationship.
collection activities.
•Factoring helps in
eliminating the risks of
bad debts.
•It gives an opportunity to
offer
credit to customers.
•It helps in building credit
history and no long‐term
obligation. 20
 Commercial
Paper
 An unsecured money market instrument issued in the
form of a promissory note.

 Corporates , Primary dealers and All India Financial

Institutions are eligible to issue CP.

 Maturities between Min 7 days & Max 1 year

 Actively traded in secondary market.

21
 Issue of Commercial
Paper
C.P. can be issued by company whose

Working capital limits are sanctioned by bank/s or

FIs.

Borrowal account is classified as a Standard Asset

by the financing bank.

Specified Credit rating from SEBI registered CRAs. .

Current ratio is 1.33:1

22
 Commercial
Paper
Advantage Disadvantag
s es
• Flexibility • Available only to select
• Low Cost blue chip with good
alternative to rating
borrowing • Low credit limits from
from bank bank
• It is unsecured • Very closely regulated
so no lein is by RBI
created on • Only for short tenure
assets

23
 Inter Corporate
Deposits(ICD)
 A deposit made by one company to another.

 Generally for tiding short term fund mismatch.

 Borrowing under ICD is restricted to 50% of the Net

owned funds .

 Tenure ‐ 7 to 365 days.

 ICD’s are of 2 types:

Fixed Rate ICD : Interest rate is fixed
Floating Rate ICD : They are linked to NSEs MIBOR.

24
 Inter Corporate
Deposits
Advantages  Disadvantages
•More flexible • Interest rates are higher
•Can raise money at short than those in the other
notice markets.
•Very Less documentation • ICD market is not well
except letter and PDC’S organised with very little
information available
publicly about
transaction details.

25
 Sources of Long Term
Finance
• Term Loans
• LAP & LRD
• Lease & HP Financing
• Debentures
• Venture Capital/Private Equity
• AIF
• External Commercial Borrowing
• Retained earnings
• Others – IPO (main platform/ sme platform,
FPO, GDR, ADR, Public Deposits)

26
 Term
Loans
 Long term debt with a maturity of more than 3
years.

 Obtained from Banks and FI’s.

 Mainly to finance company’s capital

expenditure.

 Credit is extended under a formal loan

agreement.

27
 Steps for Term
Loan
Preparation of Detailed Project Report

In‐Principle Approval of Project TEV Study

By Independent Consultants

Detailed Appraisal

Final Sanction

Legal & Other Compliances

Disbursal of Loan
28
 Term
Loans
Advantages
Disadvantages
• Can be tailored to • Payment of interest and
meet specific needs principal is mandatory
through negotiation
It’s default may threaten
with lender
existence of firm.
• More readily
•Only creditworthy firm with
available
good collateral can raise Debt.
• No dilution of
•Usually fixed maturity date
control
• Flexibility
• Repayment holidays

29
 LOAN AGAINST
PROPERTY
LAP is similar to other long term loans like
Corporate loan, home loan, Equipment Loan etc.
Quantum of Loan : Depends on type of property
& income of the borrower (LTVs at 65‐ 80% of PMV)

 Tenure : Flexible for 3 ‐7 years

 Interest : 11%‐14% p.a.
Rates : Charge on Property
 Security

30
 LEASE RENTAL
DISCOUNTING
LRD is a type of Term Loan offered against rental
receivables derived from long term lease contracts with
corporate tenants
Quantum:
Based on the discounted value of the future rentals.
60% to 80% of underlying property value.
Tenure: 7‐15 years (Linked with lease period,lock in
period, quality of tenant etc.)
Repayment Mode: Generally Rentals are payable by
the tenant directly to an escrow account with lending
bank.
Security: The underlying leased property taken as
prime security.
ROI ‐ @ 11‐13%
31
 Lease
Financing
• It is a contract in which the asset is purchased
initially by the lessor (leasing company) and
thereafter leased to the user(lessee company) who
pays specified rent at periodic intervals.
• Types of leases
 Financial lease
 Operating lease – Aviation & Heavy Machines(Oil
Rigs) & Construction Equipments
 Sale and lease back

32
 Lease
Financing
Advantages Disadvantages
•Fixed rate •More costly
than purchase
•Holder pays •High fixed cost
only for use per month +
Liability of GST
•Commitment
•Better
for entire lease
liquidity
period

33
 Hire
• Purchase
Transaction in which goods are let out on hire with
option to the hirer to purchase with following
conditions:
 Payment made in installment over specified period

 Possession given to hirer at start of contract

 Title of the assets passes to the hirer on payment of

last installment

 Each installment is treated as hire charges (if default in

any installment seller entitled to take away the
goods).

 Hirer is free to return the goods without being required

to pay any further installments falling due after the
return 34
 Hire
Purchase
Advantages
Disadvantages
• Get possession • Buyer usually has to
withoutfully paid for
having pay extra
it. • One does not get title to
•Hirer can terminate the goods until final
it at will without payment is made.
payment of further • Creditor‘s
installment. harassment
•No burden since • Liability of GST
payments in
installments over a
period of time.
35
 Debentures

 Debentures are debt securities

 Issued for Fixed Coupon Rate

 Undertaking to repay the debt at a

specified date

 Debenture holders have no right to vote

 Minimum Rating of A & Above is preferred

 Only secured debentures are allowed

36
 Debentures
 Advantages Disadvantages
• No dilution of •Charge on assets
control •Fixed Interest
• Long term source •Rating is must
• Low rate of interest •Not for all. Eg: Co. with
as compared to
unstable earnings,
dividend
insufficient FA .
• Can be redeemed
anytime

37
 Venture
Capital
• It is money for new, young and / Or small
businesses that typically have little or no access
to capital markets.
• Features
 Equity participation
 Participation in management
 Long term Investment
 High risk
 Lack of liquidity

38
Stages in Venture Capital
Financing
 Early Stage Financing

 Expansion Financing

 Acquisition / buyout
financing

39
Venture Capital Investment
Process
Deal origination

Screening

Due diligence (Evaluation)

Deal structuring

Post investment activity

Exit plan

40
 Venture
Capital
Advantages
Disadvantages
• Provides large sum • Loss of control
of long term • Loss of
equity finance
• Venture capitalist • autonomy
Lengthy and
bring expertise, complex
provides advice process
and support.
• Future funding
are easily secured
•Venture capitalist has network of
contacts which may add value to
company

41
External Commercial
Borrowing
(ECB)
 Refers to foreign currency loan in the form of bank
loans, securitized instruments availed by residents
from non resident lenders with minimum average
maturity of 3 years.

 Department of Economic Affairs, Ministry of Finance

along with RBI monitors & regulates ECB guidelines
& policies.

 FCCB, Preference Shares & FCEB are also governed

by ECB Guidelines.
42
 Forms of ECBs
 Bank loans;
 Securitized instruments (e.g. floating rate notes
and fixed rate bonds, non‐convertible, optionally
convertible or partially convertible preference
shares/debentures);
 Buyers’ credit;
 Suppliers’ credit;
 Foreign Currency Convertible Bonds (FCCBs);
 Financial Lease; and
All the forms of borrowing can be availed of both
under the automatic and approval routes

43
 Security for raising
ECB
i. AD Cat I banks are permitted to allow creation of charge
on immovable & movable assets, financial securities and
issue of CG and/or PG in favour of overseas lender/
security trustee, to secure the ECB to be raised / raised
by the borrower during the currency of the ECB with
security co‐ terminating with underlying ECB, subject to
that:
a.the underlying ECB is in compliance with the extant ECB
guidelines,
b.there exists a security clause in the Loan Agreement
requiring the ECB borrower to create charge, in favour of
overseas lender/ security trustee, on immovable assets/
movable assets/financial securities/issuance of CG and/
or PG, and
c.NOC from the existing lenders in India has been obtained.
 External Commercial Borrowing
 Guarantee : Issue of BG, standby LC, LOU or LOC by
banks, FI and NBFCs to secure ECB is not permitted.

 Refinancing : The existing ECB may be refinanced by

raising a fresh ECB subject to the condition that the
fresh ECB is raised at a lower all‐in‐cost and the
outstanding maturity of the original ECB is
maintained.

45
 ECB Liability Equity
Ratio
•Automatic Route • Approval Route
The total ECB liability The total ECB liability
should not be more should not be more
than four times of than seven times of
the equity the equity
Contributed. Contributed.

46
 Tips to save borrowing cost
 Some Common Situations & SUGGETIONS
• If you have imports
 Always use buyer’s credit@Libor+1.25% i.e
approx 1.75% to 2 % (If no exports, go for
hedging also)
• If you have exports
 Use PCFC/ FBN / FBP / FCNR(B) facilities. (Even
SME‘s can take sub‐limit with CC limit)
• If you have good collateral
 Always ask for best CC rates or convert part of
CC in to WCDL / FCNR(B) Loan
•  Change of bank
 Change from co‐operative/small pvt. Banks to
bigger PSU banks/foreign banks for better
interest rates
47
• If you are supplier to biggies like HUL, ITC, PFIZER,
ONGC etc…..
Never take spot payment against cash discount. It costs
you 18% to 24% p.a. instead take bill discounting
from banks @ 10%‐12% p.a
• If you have 100% collateral for your CC limit
Better convert your part CC to mortgage loan/ OD at
much better rates
• If you want to increase negotiation power
Go for External Rating to take best interest rates
benefit.
• If you want better rating & avoid penal interest
Submit Monthly, Quarterly, Half yearly statements in
time

48
• If you are in a liquidity crunch for temporary reason
Go & explain your problem to bank and take Adhoc limits
instead of spoiling track record of not paying creditors
• If you are in good financial position
Always avail cash discount from your supplier say 2% p.m.
and use bank limits of 12%‐13% p.a.
• If you are importer and exporter
Always deal with a forex branch of bank to avail better
Rs. $ rates
• If you have large limits say 50 Cr +
Always deal with more than one bank to negotiate
better….

Remember…you don’t get what you have…but you get

what you negotiate….

49
CA. SNEHAL KAMDAR
9869351460
snehal.kamdar@jjkandco.com

50