05-06-2013, 12:30 PM
SOURCES OF WORKING CAPITAL FINANCING
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Differences between shares and debentures
• Shareholders are effectively owners; debenture-holders are creditors.
• Shareholders may vote at AGMs (Annual General Meetings) and be elected as directors; debenture-holders may not vote at AGMs or be elected as directors.
• Shareholders receive profit in the form of dividends; debenture-holders receive a fixed rate of interest.
• If there is no profit, the shareholder does not receive a dividend; interest is paid to debenture-holders regardless of whether or not a profit has been made.
• In case of dissolution of firms debenture holders are paid first as compared to shareholder.
(iii) Public deposits
(iv) Ploughing back of profit.
Here I am giving little explanation of ploughing back of profit . It means save some profit from business and when need of working capital it uses this is called ploughing back of profit this is good long term source of working capital.
(V) Loan from financial institution
A loan is the amount of money that is given to a company on the agreement they will repay the amount borrowed in a period that exceeds 12 months and at predetermined interest rates. Long-term loans are usually secured against certain assets and are offered by commercial banks, the government and financial institutions. This type of loan provides the long-term working capital for the business.
b) Temporary / Short term sources
(i) Indigenous bankers are the short term source for financing the working capital .
(ii) Trade credits
Trade credit means getting of goods on credit . This is also a short term source of working capital. This credit service offered by suppliers allows businesses to get goods and pay for them later. This is a source of working capital that may be acquired from all suppliers depending on the business arrangements, the type of business you conduct and the worth of the credit to be offered.
(iii) Instalment credit
( iv) Income received in advance
(v) Advances received from customers
(vi) Bank loan include cash credit and overdraft
Short-term loans are loans that are to be repaid within a year from the time they are borrowed. Bank overdraft is one such source of business finance. A bank overdraft is a withdrawal made by a business that exceeds the amount of balance in its bank account, although the amount of money does not exceed a set limit.
( vii) commercial papers
(viii) Purchasing and discounting of bills
( ix) Letter of credit
This is a form of a loan agreement between the bank and the borrower that enables the borrower to acquire some amount of the funds on demand, but the borrower does not have to take the loan. A business may secure working capital through this service if it has recurring expenses at regular intervals.