EDP Notes

There are basically two sources available for financing project- internal sources and external
sources. If the size of the project is large, the fund requirement will have to be financed from
external sources. The technique of raising capital from multiple sources is known as layered
financing. The following shows the various sources of project finance

A) SOURCES OF LONG TERM FUND (FINANCE FIXED CAPITAL REQUIREMENT):-
1) Issue of shares.
2) Issue of debentures.
3) Term loans from specialized financial institutions like IFCI, IBRD etc.
4) Venture capital.
B) SOURCES OF MEDIUM TERM FUNDS (FINANCE FIXED WORKING CAPITAL
REQUIREMENT):-
1) Public deposits.
2 ) Deferred credits.
3) Lease finance.
4) Subsidy and other incentives/assistance from the government.
5) Hire purchase.
C) SOURCES OF SHORT TERM FUNDS (FINANCE WORKING CAPITAL
REQUIREMENT):-
1) Trade credit.
2) Commercial banks.
3) Accounts receivable.
The important means of finance are discussed as follows:
1) SHARE CAPITAL: - Shares may be issued by a company after its incorporation or by an
existing company. There are two types of share capital.
A) Equity Share Capital: - It represents the contribution made by the equity shareholders.
The advantage of raising equity capital is that the company need not mortgage any of its assets to
secure it from the market.
B) Preference Share Capital: - They enjoy a preferential right in respect of dividend and
also repayment of capital in case of winding up in priority to equity shareholders. Financing
through preference shares is much cheaper than the equity shares. -
2) DEBENTURE CAPITAL: - It refers to borrowings. Debenture holders being creditors have
neither voting powers nor control in policy making. They get a fixed rate of interest even if the
company incurs losses.
3) TERM LOANS: - It is granted on the basis of a formal agreement between the borrower and the
lending institution. Long term capital provided directly by a lender in the form of a negotiated
contract according to all details of the agreement is called term loan.
4) VENTURE CAPITAL: - It refers to giving capital to enterprise that has risk and adventure. It is
a financial investment in a highly risky project with the objective of earning a high rate of return.
5) PUBLIC DEPOSITS: - A company can raise deposits to meet its capital needs directly from the
public at an interest rate generally above the bank rate.

6) DEFERRED CREDITS: - Under this arrangement payments to suppliers of plant and
equipments are made in agreed instalments over a specified period of time at some agreed rate of
interest on the outstanding balance.
7) INCENTIVE SOURCES: - The government and its agencies may provide financial support as
incentives to certain types of promoters or for setting up industrial units in certain locations.
8) LEASE FINANCING: - it can be explained as a contract between the owner of the asset and the
user of the asset whereby the owner of the asset gives it to the user for a consideration. The owner
of the asset is called the lessor and the user of the asset is called the lessee. The consideration which
is required to be paid by the lessee for using the asset is called lease rental.
9) INSTITUTIONAL FINANCE: - There are several financial institutions for giving financial
assistance to entrepreneurs. Some of them are IDBI, IFCI, SIDBI, NABARD etc.