Short Term and Medium Term Sources

Short Term and Medium Term
Sources
SUBMITTED BY:
SYNDICATE 4
Abhijit Seam
Kunal Kumar Singh
Hemant Nikam
Pallavi Wasnik
Shruti Verma
Vaibhav Sachdev
Agenda
2
Short term sources of finance

Medium term sources of finance
Trade credit
Public Deposits
Inter-corporate Deposits
Commercial Paper
Certificates of Deposits
Leasing & Hire Purchase
SITM 2010-2012 Corporate Finance 12/08/2021

Sources of funds
3
Sources of
Funds
Internal External
Sources Sources
Short term:
Profit Depreciation Sales of assets Long-term: Overdraft
Share Capital Leasing
Loan Capital Credit card…

Short Term Finance
4
For smooth running of business operations
Enables firms to hold stock of raw materials
Goods can be sold on credit
Increase the volume of production at a short notice
Allow flow of cash during the operating cycle

Merits of short term finance
5
Economical
Flexibility
No interference in management
May also serve long term purpose

Demerits of Short Term Finance
6
Fixed Burden
Charge on Asset
Difficulty of raising finance
Legal Formalities

Medium Term Sources of Finance
7
Finance the business for up to 5 years

Medium-term financing can be raised from the following
sources:
• Preference shares
• Public deposits/fixed deposits for duration of three years
• Commercial banks
• Financial institutions
• State financial corporations
• Lease financing / hire purchase financing
• External commercial borrowings
• Foreign currency bonds

Trade Credit
8
An arrangement to buy goods or services on

account, that is, without making immediate cash
payment.
For example, Wal-Mart, the largest retailer in the

world, has used trade credit as a larger source of
capital than bank borrowings; trade credit for Wal-
Mart is 8 times the amount of capital invested by
shareholders

Advantages
9
No security
No Interest
Varying terms and condition

Public Deposit
10
Money received by a company through the deposits

or loans collected from the public.
The public includes

• General public
• Employees
• Shareholders of the company but excludes the
money received in the form of shares and debentures

Advantages
11
The procedure of inviting public deposits is simpler

and involve lesser formalities
The rate of interest payable by the company on

public deposits is lower than the interest on loans
from banks and other financial institutions.
There is no dilution of shareholders' control as the

depositors have no voting rights and cannot interfere
with the internal management of the company.

Limitations
12
Public deposits with the companies may cause a

diversion of resources into non-priority and
undesirable areas.
Uncertain conditions may lead to withdrawal of

deposits if the company is not performing well.

Inter Corporate deposits
13
Inter-corporate deposits are deposits made by one

company with another company, and usually carry a
term of six months.
The transaction is free from bureaucratic and legal

hassles.
The market of inter-corporate deposits depends

crucially on personal contacts.

Types of ICDs
14
Three Month deposits To

Tosolve
solveshort
shortterm
term
capital
capitalinadequacy
inadequacydue due
to
totax
taxpayment,
payment,
Six Month deposits payment
paymentof ofdividends
dividends
etc.
etc.
Six month deposits
Rate are
Rateof
Six month deposits ofinterest
are
interest :12%
:12%
usually made with first
usually made with first
Call deposits class
classborrowers
borrowers
Rate
Rate of
of interest
interest :15%
:15%
On
Ongiving
givingaaone
oneday
day
notice,
notice,this
thisdeposit
depositcancan
be
bewithdrawn
withdrawnby bythe
the
lender.
lender.
Rate
Rateof
ofinterest:
interest:10%
10%

Commercial Paper (CP)
15
Commercial Paper (CP) is an unsecured money

market instrument issued in the form of a
promissory note.
Used to generate working capital and for buying

inventories.
Can be issued for a maturity for a minimum of 15

days and a maximum upto one year from the date of
issue.

Types of CP
16
Promissory Notes The

Themaker
makerisisthe theindividual
individual
Drafts who
whopromises
promisesto topay
paywhile
while
the
thepayee
payeeor orholder
holderisisthe
the
Checks person
personto towhom
whompayment
paymentisis
promised.
ItItisisaathree-party
promised. paper
Certificates of Deposit three-party paper
ordering
orderingthe thepayment
paymentof of
money. The drawer
money. The drawer is the is the
individual
individual issuing
issuing the order
theof order
AAcheck
check is
isa aspecific
specific kind
kind of
to pay,
pay,while
towhich while the
thedrawee
drawee isis
draft,
draft, which is
is drawn
drawn on
on aaorder
the
the party
party to
to whom
whom the
the order
bank
bank and
and payable
payable on
on
to
topay pay isisgiven.
given.
demand
demand toaaparticular
to particular
individual
individualor orto tothe
thebearer,
bearer,
in
inwhich
whichcase caseititcan canbebe
written
writtenpayable
payableto to"cash."
"cash."

Advantages
17
High credit ratings fetch a lower cost of capital.
Wide range of maturity provide more flexibility.
It does not create any lien on asset of the company.
Tradability of Commercial Paper provides investors

with exit options.

Limitations
18
Its usage is limited to only blue chip companies.
Issuances of Commercial Paper bring down the bank

credit limits.
A high degree of control is exercised on issue of

Commercial Paper.
Stand-by credit may become necessary

Certificate of deposit
19
A certificate of Deposit or CD is a time deposit, a

financial product commonly offered to consumers by
banks and credit unions.
They are different from savings accounts ,CD has a

specific, fixed term (often three months, six months,
or one to five years) and fixed interest rate.

Different CDs
20
Callable CDs
Brokered CDs
Bump-up CDs
Liquid CDs
Step-up CD or step-down CDs
Zero-coupon CD
Add-on CDs
Variable-rate CDs

Advantages
21
Relative safety and the ability to know your return

ahead of time.
Earn more than in a savings account, and no risk as

in case of the stock market.

Limitations
22
The returns are smaller compared to many other

investments.
Money is tied up for the length of the CD and

you won't be able to get it out without paying a
penalty.

Lease
23
A lease is a contractual arrangement whereby one

party grants the other party the right to use the asset
in return for a periodic payment i.e. lease rental.
It is renting of an asset for a specific period.
Lessor - Owner of the asset

Lessee – User of the asset

Lease Operation
24
Equipment
Sale Supplier
Payment
Delivery
Lessor
Lease Payment
Lease Lessee
Standard lease operation

Types of Lease
25
 Finance Lease
Finance
Financelease
leasewhich
which
Direct Lease isismedium
mediumto tolong
long
term
termand
andwhere
wherethethe
Leveraged Lease asset
assetisishired
hiredtotoonly
only
one
onelessee.
Sale and Lease Back lessee.
 Operating Lease
Operating
Operatinglease
leasewhich
which
isisshort-term
short-termand
and
where
wherethe
theasset
assetmay
maybe
be
hired
hiredto
toseveral
several
lessees.
lessees.

Hire-purchase
26
The seller hands over the assets to the buyer but the
title to good is not transferred
The buyer become the owner of the goods and

acquires the title to the goods only when he makes
the payments of all the installments

Advantages
27
Tax benefits
Risk of obsolescence
Convenience

Limitations
28
Lease contract terms of lease may be inconvenient
If lessor winds up the business ,normal business of

lessee is impacted

29
Thank You

Short Term and Medium Term Sources

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Short Term and Medium Term Sources

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Short Term and Medium Term

Short term sources of finance

SITM 2010-2012 Corporate Finance 12/08/2021

SITM 2010-2012 Corporate Finance 12/08/2021

For smooth running of business operations

Enables firms to hold stock of raw materials

Goods can be sold on credit

Increase the volume of production at a short notice

Allow flow of cash during the operating cycle

SITM 2010-2012 Corporate Finance 12/08/2021

No interference in management

May also serve long term purpose

SITM 2010-2012 Corporate Finance 12/08/2021

Difficulty of raising finance

SITM 2010-2012 Corporate Finance 12/08/2021

Finance the business for up to 5 years

SITM 2010-2012 Corporate Finance 12/08/2021

An arrangement to buy goods or services on

For example, Wal-Mart, the largest retailer in the

SITM 2010-2012 Corporate Finance 12/08/2021

Varying terms and condition

SITM 2010-2012 Corporate Finance 12/08/2021

Money received by a company through the deposits

The public includes

SITM 2010-2012 Corporate Finance 12/08/2021

The procedure of inviting public deposits is simpler

The rate of interest payable by the company on

There is no dilution of shareholders' control as the

SITM 2010-2012 Corporate Finance 12/08/2021

Public deposits with the companies may cause a

Uncertain conditions may lead to withdrawal of

SITM 2010-2012 Corporate Finance 12/08/2021

Inter-corporate deposits are deposits made by one

The transaction is free from bureaucratic and legal

The market of inter-corporate deposits depends

SITM 2010-2012 Corporate Finance 12/08/2021

Three Month deposits To

SITM 2010-2012 Corporate Finance 12/08/2021

Commercial Paper (CP) is an unsecured money

Used to generate working capital and for buying

Can be issued for a maturity for a minimum of 15

SITM 2010-2012 Corporate Finance 12/08/2021

Promissory Notes The

SITM 2010-2012 Corporate Finance 12/08/2021

High credit ratings fetch a lower cost of capital.

Wide range of maturity provide more flexibility.

It does not create any lien on asset of the company.

Tradability of Commercial Paper provides investors

SITM 2010-2012 Corporate Finance 12/08/2021

Its usage is limited to only blue chip companies.

Issuances of Commercial Paper bring down the bank

A high degree of control is exercised on issue of

Stand-by credit may become necessary

SITM 2010-2012 Corporate Finance 12/08/2021

A certificate of Deposit or CD is a time deposit, a

They are different from savings accounts ,CD has a

SITM 2010-2012 Corporate Finance 12/08/2021

SITM 2010-2012 Corporate Finance 12/08/2021

Relative safety and the ability to know your return

Earn more than in a savings account, and no risk as

SITM 2010-2012 Corporate Finance 12/08/2021

The returns are smaller compared to many other

Money is tied up for the length of the CD and