Projct Sources Ppt1

8/3/2019 Projct Sources Ppt1

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DIFFERENT SOURCESOF PROJECT FINANCE

PRESENTED BYHIRAN H L

FUS 100608DEPT. OF

FUTURES STUDIESUNIVERSITY OF KERALA


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SOURCES OF PROJECT FINANCE

There are various sources for financing projects.These are classified broadly as:

Short term financemedium term finance &

long term finance


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Short term finance sources:

The sources of financing which finance theproject for a short duration (1-2 years).

E.g.: trade credit


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M edium term sources:

These are the sources of financing whichfinance the project for a duration which is

neither too short nor too long (3-10 years).

E.g.: Leasing


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Long term sources

These are the sources of financing whichfinance the project for a long durationduration- usually more than 10 years

E.g.: mortgage


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The major sources of finance are

Owner s capital/savingsOverdraftTrade creditOrdinary share capital

Hire purchaseVenture capitalLeasingBank loansM ortgage

Sale of assetsRetained profitsDebenture

characterized by:

origin

liability

duration of finance


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Owners Savings

When the owner uses his or her own savings toinvest in the business.

Usually a sole trader will start up a business withtheir own savings.


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Sale of Assets

When a business sells off fixed and current assetswhich it no longer needs, in order to raise finance fornew projects.


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Retained Profit

Profit kept after all expenses and dividends are paidout.

The profit left can be ploughed back into thebusiness for expansion purposes.

It belongs to the business.


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OverdraftThe bank allows a business to go overdrawn up toan agreed amount.

The business only pays interest on the amount

overdrawn.

Amt. of interest paid is usually higher than a bankloan; so caution is needed when using an overdraft.

Usually used to pay small bills and expenses.


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Trade Credit

When suppliers give time to pay for supplies andstock

usually with a 30 day payment period.

This can be difficult for sole traders to acquire in the

early days.


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Leasing

When an asset is used by a business but is neverowned by the business.

The business pays a monthly amount to use the asset

in return they have access to the latest equipmentand support if the asset breaks or needs repair.

M any businesses lease cars or computerequipment.


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Hire PurchaseWhen an asset is bought over a period of time withrepayments made each month until, the finalpayment

On final payment, the item becomes the property of the firm.

This spreads the cost of purchasing assets


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Bank LoanAn amount of money is borrowed from the bank

and then repaid with interest over a set period of time.

The loan period can range from 1 year to 10 year.

Look for the APR amount the higher the APR themore interest is paid.


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Debentures (debt capital)Long term borrowing similar to selling shares, but

with the promise of repaying

the amount borrowed at a fixed period in time,usually for a set amount of interest.

Usually used by large organizations and thedebenture is fixed upon a particular asset.


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M ortgage

This is a long term loan (usually over 25 years)provided by a bank/building society in order to buyproperty.

Usually secured on the property itself so if repayments are not made the mortgage lender canrepossess the property


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Venture CapitalVenture capitalists are groups of (generally verywealthy) individuals or companiesspecifically set up to invest in developing companies(invest in small, risky business)

In return the venture capitalist gets some say in therunning of the company as well as a share in theprofits made

business loses some of its independence in decisionmaking.


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Ordinary Share (equity) Capital

A share in the business is sold to an individual oranother business. This money is then

used to purchase new assets or to expand. Thebusiness changes from a Ltd to a plc

and shares can be traded on the stock market.


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Types of organization & access to the different sources of finance

Larger the organization, the more sources of finance are available.


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Financial institutions(Long term)

Insurance companies and pension funds :

prefer Long term investment- liability to policyholders and pensioners

recently, invested in shares of ltd companies

ie, applications for capital from smaller companiesare entertained .


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U nit trusts :

M oney received from investors is added to a fund invested insecurities appropriate to investors.

The fund is divided into units, each representing a share of fund ( open ended )

Specialize in overseas investments and new issues of

securities through stock exchange.

Units can be bought and sold through the unit trust managers


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OEIC (Open ended investment co.)

They are open ended funds like unit trusts,

But are corporations rather than trusts.

Issue shares-not units-

Greater flexibility and wider appeal to investors


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Building societies

Lending to individuals to enable them to buy theirhomes

Funds are borrowed on short term from savers andloaned for the long term to borrowers

Risk is smoothed by variability of interest rate

charged to borrowers

Assistance is also given to small businesses topurchase premises


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Financial institutions

( short and medium funds)Commercial banks :traditionally take short term deposits from theircustomers and lend short term loans and overdrafts

1/8 th of their total funds is kept in cash or relativelyliquid form

Now, principal lenders in housing market


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Discount houses:

traditional function is to provide short temfinance by discounting bills of exchange

but they have extended their activities toinclude govt. treasury bills,local authoritybonds and certificates of deposit.


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M erchant banks

These were originally merchants whodeveloped lending businessesServices are extensive include:advice on export financing, foreign exchange

dealingcorporate financial planning, leasing finance,hire purchaseventure and development capital for smallbusiness


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Foreign Banks

Branches of overseas bankscompete with commercial banks in provision

with short-medium-term finance-Particularly for overseas trade and investment


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Finance houses

Deal mainly in hire purchase and leasefinancing

Short term depositers provide most of fundsLends over medium term, risk adjusted oncharges


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Factoring and invoice discountingcompanies

Individual companies( subsidiaries of commercialbanks) provide short term finance by purchasingbusiness debts

Factoring companies also offer debtor s ledgermanagement as an additional charge


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Leasing companies

M ajority are subsidiaries of commercialbanks, merchant banks, finance houses

Some are independent in finance andleasing association

They specialize in lease finance


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Reference

Financial management - Geoffrey Knott , 4 th

edition

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Projct Sources Ppt1