Production process is long Gap between production and sales Time lag between revenue generated through sales

and initial expenditure Funds remain locked for longer period in Fixed Assets Large scale production requires large investments Additional funds for expansion

LONG TERM FINANCE More than 5 years MEDIUM TERM FINANCEBetween 1 5 years SHORT TERM FINANCE Less than 1 year

SHARES
It is a unit of capital of the company It is issued by Joint stock company to public Each unit is divided into definite Face Value (Rs.10 or Rs.100 each) Person holding the share is shareholder Shares are transferable

A share certificate is issued to the shareholders indicating number of shares and amount

PREFERENCE SHARES
Some investors take lesser risk and are interested in regular income while some others may take high risk to get more profits. Company can cater to both. For the former we have preference shares

They carry preferential rights over equity shareholders They have right to receive dividend at fixed rate They have right to receive back capital in case company is wound up Investments are safe and get dividend regularly

EQUITY SHARES
No right in payment of dividend or repayment of capital
No fixed rate of dividend They get payment after payment to preference shareholders Rate depends on surplus profits They can take part in the management of the company They carry more risk

MERITS
To shareholders Good profits then high dividend

Value goes up with increase in profits

Can be easily sold in market Greater say in the management according to voting rights To Management Raise fixed capital by issuing equity without any charge

Capital raised is not required to be paid during life time of the company
No liability for payment of dividend

DEMERITS
To shareholders Uncertainty about payment of dividends Speculative Danger of over capitalization

Ownership in name only

Higher risk To management

No trading on equity
Conflict of interests

DEBENTURES
The company can borrow large amount of funds from public by issuing loan certificate called debentures.

Its a written acknowledgement with Company seal, containing terms and conditions, ROI, time repayment, security offered etc They are the creditors of the company entitled to periodic interests at fixed rate.
They are repayable after a fixed period of time

No voting rights
They are secured.

TYPES OF DEBENTURES

1. REDEEMABLE
2. IRREDEEMABLE

3. CONVERTIBLE
4. NON- CONVERTIBLE

5. SECURED
6. UNSECURED

MERITS
Raising funds without allowing control over the company. Reliable source of long term finance

Tax benefits
Investors safety

DEMERITS
Interest on debentures needs to be paid every year Debentures mostly secured. Company without FA cannot borrow money Payment of principal sum at predecided time

RETAINED EARNINGS
Company sets aside part of the profits for future requirement of capital. Used to meet long term financial requirements According to Company Act are required to transfer part of their profits in reserves Internal financing

MERITS
Cheap source of capital
No expense as no obligations Financial stability Continue their business even in depression and build goodwill Benefits to shareholders

DEMERITS
Can retain only when there are Huge profits

Dissatisfaction among shareholders

Fear of monopoly Mismanagement of funds

PUBLIC DEPOSITS
Interest payable is less than that of bank borrowing Unsecured loans for the company

Time period 6 months to 3 years

Fixed Rate of interest No complicated legal formalities

Max ROI is fixed by the RBI

Amount of deposit should not exceed 25% of Paid up capital. Company has to maintain Register of depositors containing all details as to public deposits If interest payable exceeds Rs.10,000 pa then company is required to deduct TDS

MERITS
Simple and easy No charge on assets

Economical
Flexibility

DEMERITS
Uncertainty. The company needs to high repute, high credit agency to attract deposit Insecurity

Lack of attraction by professional investors

Uneconomical Hindrance to growth capital market Over capitalization

TERM LOANS

Liabilities accepted by the company for purchase of Fixed Assets and repayable from 3 to 10 years

MERITS
Flexible For definite period hence not a permanent burden

Banks keep financial operations of company a secrete

Less time and cost as compared to issue of shares and debentures Banks dont interfere in internal affairs Loans paid back in easy installments

DEMERITS
Personal guarantee

Uncertainty in continuity
Too many formalities Time consuming