ALTERNATIVE SOURCES OF FINANCE Presented by CA Pradip. K. Modi Dt.28-06-2011

ALTERNATIVE SOURCES OF FINANCE

Presented by CA Pradip. K. Modi Dt.28-06-2011

ALTERNATIVE SOURCES OF FINANCE

ALTERNATIVE SOURCE OF FINANCE IS NOTHING BUT THINKING OUT OF BOX

WHY ALTERNATIVE SOURCE OF FINANCE?

ALTERNATIVE SOURCE OF FINANCE IS A PROCESS TO FIND OUT FINANCIAL SOLUTION BASED ON NEED OF BUSINESS

Presented by CA Pradip. K. Modi1

Alternative Sources of Finance

• DISCUSSION IS BASED ON MSME

• 74% ENTERPRISES BECOME SICK OUT OF TOTAL DISORDER INDUSTRIAL MSMEs ON ACCOUNT INADEQUATE OR MISMATCH OF FINANCE.

• 2009-10 PRIVATE EQUITY INVESTMENT DEEP BY 58% IN SMEs AND JUMPED 33% IN FIRST QUARTER

Presented by CA Pradip. K. Modi


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VENTURE CAPITAL / PRIVATE EQUITY

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Leasing

FRANCHISING

FACTORING

FORFEITING

COMMERCIAL PAPERS

Purchase Order Funding

Loan Against Shares (LAS).

Structured Investments

Line Of credit



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LEASING

Lease – a rental agreement that extends for a year or more and involves a

series of fixed payments

Leasing – similar to borrowing funds in order to purchase an asset

It is an agreement between 2 parties – the user (the lessee), the owner

(the lessor). The lessor of an asset grants the lessee the right to its

exclusive possession and use for a specific period and under specified

conditions, in return for specified periodic rental or lease payments. The

lessee acquires the use but not ownership, he binds himself to make

periodic lease payments at stipulated intervals for a stated period. So, the

lessor actually owns and is contracting out the services of the asset,

retains title to and consequently ownership of that asset.Presented by CA Pradip. K. Modi


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TYPES OF LEASES

According to the length of the lease period:

operating lease – short-term, the contract period much shorter than the

economic life of an asset, is cancellable, after a set period an asset is

returned to the lessor, rewards and risks of ownership stay with the

owner.

financial lease – long-term relation between the lessor and the lessee;

although legal ownership remains with the lessor, it virtually transfers all

the rewards and risks to the lessee; covers a significant part of the

economic life of the asset; generally cannot be cancelled; transfers

ownership to the lessee by the end of the lease period; allows the lessee

to purchase the asset at a price lower than the fair market value of the

asset when the lease expiresPresented by CA Pradip. K. Modi


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TYPES OF LEASES (CONTINUED)

OTHER TYPES

direct leasing – the lessor purchases the property directly from the manufacturer and leases that property to the lessee

sale and leaseback agreement – a business sells an asset to a lessor and simultaneously enters into a lease contract to lease itback in order to raise finance and continues to use the asset

leveraged lease – has 3 parties involved: lessee, lessor, lender (supplies funds to the lessor to acquire an asset)

employee leasing – leasing company (professional employer organization) is the official employer, assumes responsibility for work, overseeing all HR-related functions



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FRANCHISING

Franchising – a method of expanding business on

less capital than would otherwise be needed.

A franchisee pays a franchisor for the right to

operate a local business, under the franchisor´s

trade name. The franchisor will charge the

franchisee an initial franchise fee and regular

payments (usually a percentage of the franchisee´s

turnover).Presented by CA Pradip. K. Modi


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FACTORING

Factoring – a method of raising short-term finance; a factor will

manage the sales ledger of the business and will be prepared to

advance sums to the business based on the amount of trade

debtors outstanding;

means the selling of receivables to a financial institution so

funds can be received earlier than the normal credit period;

the business can receive between 80-90% funding f the invoice

amount



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TYPES OF FACTORING

notified/non-notified factoring –

- notified - the debtor is informed that the debt has been purchased and requested to pay the factor directly

- non-notified - the debtor is not informed

export/import factoring –

- export – domestic companies (exporters) use the factor´s services in their country for international business

- import – the use by foreign companies of factor´s services in domestic country



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FORFEITING

Forfeiting – similar to factoring, a method of trade finance

allowing exporters to obtain cash by selling their medium term

foreign accounts receivable at a discount

Forfeiter – a specialized finance firm or a bank department

performing non-recourse export financing, virtually eliminates

the risk of non-payment

Unlike factors, forfeiters typically work with the exporter who

sells capital goods commodities, or large projects and needs to

offer periods of credit from 180 days to up to 7 years



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COMMERCIAL PAPERS

a short-term unsecured „promissory“ note backed by the promise of the issuer to redeem the note at maturity,

sold on a discount basis like treasury bills; slightly higher return

limited secondary market of commercial papers



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Purchase Order Funding( Reverse Factoring)

Purpose: Working Capital

Type of Industry: Capital Goods / Long Production Process Products

Modality of operation :Limit given to borrower based on its business cycle, type of product, clientele etc. bifurcated for certain selected customers

On receipt of the confirmed order from identified customers, 40% of the PO amount will be funded to borrower.

On completion of production and generation of invoice, additional 30% - 40% of the PO amount will be further released to borrower against accepted invoice from selected clients.

The payment from clientele will be received directly to NBFC / Bank, which will be transferred to borrower after deduction of requisite charges.



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Loan Against Shares (LAS).

NBFC can fund promoters / holding companies by way of a loan against the security of listed scrips. The loan amount will be primarily based on trading volume of the scrip, its market price observed for a time period and the corresponding quantum of shares offered as security.

Key Features : Offers liquidity without having to liquidate holdings The borrower continues to avail the ownership benefits like dividends, bonus, rights etc.



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Structured Investments

NBFC believes in India Inc’s growth story and they are willing to place their bets on promising businesses. Their investments can be structured as either direct equity or mezzanine capital, the latter being in the form of preference shares, convertible bonds or non convertible debentures, based on CUSTOMER needs for capital alongside maintaining a healthy debt equity balance. Key features are:It is in the form of either direct or mezzanine capital ,which Can be structured to meet company ‘s specific needs – Common stock, preferred stock, convertible bonds, etc



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Line Of credit-Exim Bank - Procedural flow chart

1. Exim Bank signs agreement with Borrower and announces when effective. 2. Exporter checks procedures and Service fee with Exim Bank and negotiates contract with Importer. 3. Importer consults borrower and signs contract with exporter. 4. Borrower approves contract. 5. Exim Bank approves contract and advises borrower and also exporter and commercial bank. 6. Exporter ships goods. 7. Commercial bank negotiates shipping documents and pays exporter. 8. Exim Bankreimburses Commercial bank on receipt of claim by debit to borrower. 9. Borrower repays Exim Bank on due date.

Eligible GoodsCapital goods, plant and machinery, industrial manufactures, consumer durables and any other items eligible for being exported under the 'Exim Policy' of the Government of India.



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Source : E-Net 6Feb07 - Raising Money from Alternative Sources



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Source : E-Net 6Feb07 - Raising Money from Alternative Sources



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CASE STUDY - 1


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Case Study

Acumenfund Grofin E+Co Root capital REEEP



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VENTURE CAPITAL / PRIVATE EQUITY

Venture Capital /Private Equity is accessed by high growth potential, innovative and dynamic professional companies.

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Following are the major difference between Private Equity and Venture Capital:

Private Equity Venture Capital

Private equity funds prefer investments to ongoing businesses at later stages of growth via mezzanine or expansion financing. Private equity funds seek companies, which have reached a certain size (revenues exceeding $10m in Turkey), enjoy high operating profit, realise rapid growth, hold considerable market share, and create significant entry barriers in their sectors.

Seed, Start-up or Early Stage Companies with a business or product development plan are generally financed by venture capital funds



Considering the growth stage of companies and their financing reasons, the financial partnership investments can be made at different stages, like:

Seed FinancingStart-up FinancingEarly Stage FinancingExpansion FinancingMezzanine FinancingLBOMBO

These stages sometimes mark the distinction between Venture Capital and Private Equity Investments. Companies, that cannot realise profitable investment opportunities because of lack of funding and those are financially distressed but operationally viable, are attractive candidates for financial investments. The value created can be shared between the investors and investee.



Minimum Size of Opportunity which may attract Private Equity

Investor?



Private-equity investing is not easily accessible for the average investor. Most private-equity firms typically look for investors who are willing to commit as much as $25 million. Although some firms have dropped their minimums to $5 million , this is still out of reach for most people.



Accretion is focusing on later stage private equity transactions requiring an equity investment of up to $10m. This typically equates to an enterprise value of between $10m and $50m and provides an equity interest of between 20% and 80% in the investee.

Following are the parameters require to attract Private Equity Investor: Turnover greater than or equal to Rs. 50 Crores (INR) / $10 million (USD) EBIDTA greater than or equal to 18% IRR greater than or equal to 22% Shares Dilution greater than or equal to 20% Business must have scalability




THANK YOU

CA PRADIP K. MODIA-411, Safal Pegasus, Nr. Prahalad Nagar Garden,100 Ft Road, Anand Nagar Road, Prahalad Nagar, Ahmedabad. Phone no : +91-79-40065204 Fax : +91-79-40067203 Email : [email protected]


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ALTERNATIVE SOURCES OF FINANCE Presented by CA Pradip. K. Modi Dt.28-06-2011