Small business financing program
The capital required for a concern can be raised my various ways. The amount collected by cash what depends upon the conditions of the money market and the type of work for which capital is required. In an individual ownership and partnership enterprises, individual investment is the main source of finance, however they can take the loans from Banks and financial corporation.
As these are small concerns and hence these have little problem of finance as compared to that for large scale industries. These large scale industries and mainly run by joint stock companies and such as they feel large problems of financing and the funds are to be raised from various sources. Main sources of finance are the following.
1. Shares
2. Debentures
3. Public Deposit
4. Managing Agents
5. Loans from banks
FINANCING OF FIXED CAPITAL:
Fixed capital of large scale industries are financed through (i) Shares (ii) Debenture (iii) Public deposit(iv) Managing agents(v) Loans from financial institutions like industries financial corporation, state financial corporation, industrial development corporation etc.
FINANCING OF WORKING CAPITAL:
Working capital is generally financed for
(A) Regular works : Through Shares, Debentures and Ploughing back of earnings.
(B) Seasonal working capital :
Through Loans from bank, Managing agents, Public deposit and Financial Institutions.
Each of the method for raising the capital is described here under:
SHARES:
A big amount of capital required is collected through the shares issued to public. Shares can be issued at any time generally these are issued at the time of starting of new business expending or reorganizing the existing concern. Amount to be collected by shares is first decided. Then the value of share is issued to the public should not exceed this pride termed decision. Share issued by the company may be of different types. Following are the different type of shares:
1. Preference shares
2. Ordinary shares
3. Deferred shares
1. PREFERENCE SHARES:
A person holding this share is entitled to get fixed rate of dividend. He gets his rate of dividend before any amount paid to the ordinary shareholders. Thus as its name suggests, it get preference over shares for getting dividend. Similarly these shares get preference over other shares when repayment of capital is done, when these shareholders get above mentioned facility, these have limitation that they will not get more than the fixed rate of dividend even when profit is very large. These preference shares are of the following two types.
(i) Cumulative preference shares: In these share if the profit are not sufficient to pay the fixed dividend in any year then the deficit is paid up from the profit of the next year.
(ii) Non-Cumulative preference: In these share the dividend is not transferred to the next year if the profit of any year are insufficient to pay the fixed dividend.
B. ORDINARY SHARES:
These shares get thir dividend only after payment of the fixed dividend on preference shares. The advantage for the holders of the ordinary share is that is no limit of dividend, and thus they may get higher dividend if the profit are larger. If there is a loss, then ordinary shareholders do not get any dividend.
C. DEFERRED SHARES:
As the name suggests, these shares have their claim last of all. Holders of these shares get their dividend only after the payment of the dividend on all other classes of shares. Generally these shares are issued to the promoters and to the persons who have helped in the formation of the company.
2. DEBENTURES: When company desire the required finance through loans instead of scale of share, then debenture are issued. In this way it is advantageous because debentures holder can not claim for ownership and he is to be paid interest only. Debenture may be issued either for initial needs of the enterprise of for the development and extensions. Debentures holder has no liabilities but the debentures holders is on to the liabilities for which the shareholder is responsible. Debenture provides finance for a specified period and the company can adjust its financial plan accordingly
3. PUBLIC DEPOSITE:
Some of the concern raises their capital by accepting the deposit direct from the public for fixed terms generally 6 months to 7 years. Fixed capital is generally raised through long terms deposit while working capital by short period deposit. In India this method was being employed by cotton mills specially those located at Ahmedabad, Bombay and Sholapur.
The deposits are taken for 6 months in the purchasing season when cotton has to me purchased and are repaid after 6 months when the cloth s are sold. However this method has started gaining importance now.
This method has the advantage of enabling a company to keep its share capital low and to borrow at cheap rates (generally easy money id taken for this purpose) This facilities payment of higher dividend than that would be possible if the entire money were taken the shape of share capital. This systems is also helpful as the banking assistance facilities are not adequate fro industries.
MANAGING AGENTS:
This source has played a very important role in early days of industrial development in India for setting up and development of industries. Managing agents have provided fixed and working capital themselves and also arranged through other sources like inducting their friends and relative to purchase the shares and debentures arranging loans from bank and public deposits.
Managing agents had played an important role in promoting financing and management of industrial concerns. The malpractices in management by some of the managing agents have come to light in recent years and the public have become very distrustful of managing agents as a class. Hence the financing of Indian Industries has become less dependent on them that before.
LOANS FROM BANKS:
Up to some years ago. Commercial banks were providing finance only for the working capital requirement of industries and were avoiding long terms advances against fixed assets. This system was followed due to security reasons. But from this policy small entrepreneur was most sufferers.
But now a days State Bank of India and other nationalized banks provide financial assistance also to the small scale industries under liberalized scheme. The loans are granted to these industries for fixed as well as working capital requirement. State Bank of India has a special scheme to assist engineers crafts man and other qualified person who are in need of money for starting an industry.
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