different sources of financing industrial projects in India


EQUITY SHARE CAPITAL: Equity shareholders are the real owners of the company whose ownership is limited only to their capital contributions unlike partnership firms and sole-trading concerns. They bear the risks of ownership and enjoy rewards accordingly.



PREFERENCE SHARE CAPITAL: Preference shareholders get preference in the form of priority given to them while making dividend is fixed and the preference shareholders do not enjoy the voting rights on any resolution places before the company. In any year if the company is unable to pay preference dividends. The arrears will be carried forward to the next year. In the next year, cumulative preference dividend is paid. It is clear that unless the company pays the cumulative preference dividends along with the arrears the company cannot declare equity dividends. Normally preference shares are redeemed after 10 to 15 years.



TERM LOANS: A sources of long term project financing, are the long term loans given by financial institutions and banks to the companies to be repayable in less than 10 years. It is a form of debt financing. Term loans are generally used for financing fixed assets and long term working capital needs. They differ from short term bank loans which are employed for financing short term assets and short term working capital needs. Financial institutions grant Rupee term loans as well as foreign currency term loans. Term loans are secured by first Equitable mortgage of all immovable properties or assets of the company.



DEBENTURURES: Debentures are the debt financing instruments issued by large companies. These are the long term debt instruments having the similar features to those of ordinary debt. The company as to pay interest and principal installment at the specified regular times without fail. Debentures offer greater flexibility with respect to date of maturity, rate of interest, repayment etc., when compared to term loans.



Cash credit:      Cash credit is the overdraft agreement made by a bank for the purpose of borrowing by the customer. The borrower can draw the amount as often as required provided the amount does not exceed cash credit limit. Interest is charged only on the running balance but not on the limit sanctioned. The borrower is very much interest in this type of loan as he can withdraw amount as and when he requires and pays interest only on the amount he has withdrawn. However for availing this facility, the borrower has to pay some minimum charges irrespective of the level of borrowing.



Loans:  Loans are the short term loans granted by the commercial banks and the interest is repayable on the whole loan amount sanctioned unlike cash credit agreement. They are disbursed either on demand or in periodical installments.



Purchase/discount of Bills: Discount of bills is the bill of exchange having the maturity period of 90 days. It may be clean bill or documentary bill. The seller of goods draws the bill and sends it to the purchaser for acceptance. Once it is accepted by the purchaser, it is to be received back by the seller



Letter of credit:      Letter of credit is the form of advances granted by a bank in favor of his customer. Generally it is useful in case of foreign trade. On behalf of importer, the bank of the importer pays the due amount to the exporter and later on collects the amount from the customer.



DEFERRED CREDIT: It is the credit provided by the supplier of materials to the buyer so that the latter can make the payment over a period of time. Generally, the supplier provides these facility if there is bank’s guarantee furnished by the buyer. The rate of interest charged by the supplier will be high. This type of finance is short term in nature normally.



LEASE FINANCE:  It is a type of debt finance wherein two persons have the contractual agreement stating that one person gives the right to use his asset/machinery to another person for periodic rental payments. The person who grants the right is called “Lesser” and the person who uses the asset is called “Lessee”. The two types of lease are available namely finance lease and operating lease.



HIRE PURCHASE:  It is also a contractual agreement between to persons wherein one person purchase the asset and gives it on hire to another person per some periodic payments of installments. The installments cover interest as well as principal. At the end of the payment of the last installments to the hirer, the hirer gets the title of the ownership of the asset. For the calculation of installments, the hirer follows “the sum of the years digits method” so that the total interest is allocated over the years fairly.



COMMERCIAL PAPERS:  These are the short term unsecured promissory notes issued by the highly credit rated companies having a very high financial strength, they are having the maturity period ranging from 90 to 270 days. They are usually issued at discount, reflecting prevailing interest rates in the market. Commercial paper is not backed by any collateral security. Before issuing commercial papers , the company need not register them with



FACTORING:        It is the process of financing that of a companies arising from credit sales. The factor takes the responsibility on behalf the company of collection of outstanding amounts from the customers arising out of credit sales. It charges some commission of 1 to 2% of the face value of the debt for providing this service. Generally, factor advances around 70 to  80% of the book debt to the client company and charges a rate of interest which is typically higher than the lending rate of commercial banks.














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