As a finance manager, advise the directors about various sources of finance for financing the expansion of your company.
For expansion of the company as a finance manager I will advise the directors to use long-term sources of finance which are explained below :
(a) Equity Shares: Equity shares are the major constituents of the owner's funds. Equity shares provide capital on a permanent basis. There is no mandatory obligation of dividend payment. Thus payment of dividend is linked to the profitability of the company. Equity shares provide a base for obtaining loans. This source does not create any charge on assets of the company.
(b) Preference Shares: Preference shares are also part of owner's fund but their holders get 2 preferential rights for payment of dividend and repayment of capital. These shares have same merits as equity shares.
(c) Debentures and Bonds: A Debenture and a bond is a debt instrument carrying a specified rate of interest which is issued by an organisation to raise borrowed funds. A company issuing debentures and bonds enjoys the benefit of trading on equity, tax deductibility, flexibility in capital structure no dilution of managerial control and increases earning per shares. But this sources suffers from some limitations like — creates a fixed financial burden, creates a mortgage on assets, negative impact on credibility and so on.
(d) Loans from Financial Institutions: Loans from a financial institution are in the form of borrowed capital. For the expansion of the business, loans are required to be taken for long term. There are various financial institutions in India like IDBI, IFCI, UTI, LIC, which provide loans on a soft term in both domestic and foreign currency. They are easily repayable in instalments. Apart from financial assistance, specialised financial institutions provide technical advice to the borrowing business firms.
(e) Retained Earnings: Retained earnings denote profits not distributed to owners of the company but used to make reserves to meet future contingencies. It is an internal source of finding finance, It has many merits like — no charge on assets, free of cost and economic source of finance, creates no payment obligations, increases financial strength and improves the public image of the company.
(f) Global Depository Receipt and American Depository Receipts: ADRs and GDRs are negotiable financial instruments that represent underlying shares of a company issued in foreign countries (America) and in foreign currency (Dollar). Since ADRs and GDRs are issued in America & in other foreign countries and in foreign currency, the issuer company gets required the foreign exchange to meet import obligation.