Please, I need your help with this problem. Discuss the advantages and drawbacks
ID: 2816614 • Letter: P
Question
Please, I need your help with this problem.
Discuss the advantages and drawbacks of each of the following ways to finance your growth, including your sense of the real possibility of securing such financing: Securing a line of credit from the local bank Securing a term loan or an SBA loan Getting loans or investments from friends and family Finding an angel investor and giving up equity in the company Finding a venture capitalist and giving up equity in the company Looking for sourcing of funds—such as grants—to finance “green” businesses-Going public Thank you
Explanation / Answer
Introduction:-
Finance is the life blood of any individual amd any business.
Definition of Finance:- According to F.W.Paish, Finance may be defined as the position of money at the time it is wanted.
Application:-
Finance is the life blood of business. Before discussing the nature and scope of financial management, the meaning of ‘finance’ has to be explained. In fact, the term, finance has to be understood clearly as it has different meaning and interpretation in various contexts. The time and extent of the availability of finance in any organization indicates the health of a concern. Finance may be defined as the position of money at the time it is wanted.
Concept 1
Money Market fulfils the needs of the individuals which ;leads to high marketability. the detailed explaination is as below:-
Money market refers to the market where borrowers and lenders exchange shortterm
funds to solve their liquidity needs. Money market instruments are generally financial
claims that have low default risk, maturities under one year and high marketability.
Concept 2
The National Stock Exchange started its trading operations in June 1994 by enabling
the Wholesale Debt Market (WDM) segment of the Exchange. This segment provides
a trading platform for a wide range of fixed income securities that includes central
government securities, treasury bills (T-bills), state development loans (SDLs), bonds
issued by public sector undertakings (PSUs), floating rate bonds (FRBs), zero coupon
bonds (ZCBs), index bonds, commercial papers (CPs), certificates of deposit (CDs), corporate
debentures, SLR and non-SLR bonds issued by financial institutions (FIs), bonds issued
by foreign institutions and units of mutual funds (MFs).
Mutual Funds will provide an individual a long term benefit by investing money in various schemes i.e. diversifying portfolio, providing high returns and reduces the risk.
Concept 3
Various Investment Avenues
Factors to be considered are :
For example let us take fixed deposits
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1.7 Types of Investment Avenues
Before starting with the deep discussion on financial markets, we must know in a broad
sense about the types of investment avenues available in these markets. In other words
knowing the alternative financial instruments that are bought and sold in these markets.
When a person has more money than he requires for current consumption, he would
be coined as a potential investor. The investor who is having extra cash could invest
it in assets like stock or gold or real estate or could simply deposit it in his bank account.
All of these activities in a broader sense mean investment. Now, lets define investment.
1.7.1 How do you Define Investment?
We can define investment as the process of, “sacrificing something now for the prospect
of gaining something later ”. So, the definition implies that we have four dimensions
to an investment – time, today’s sacrifice and prospective gain. Can we think of Some
Transactions, which will qualify as “Investments” as per Our Definition!
1. In order to settle down, a young couple buys a house for Rs.3 lakhs in Bangalore.
2. A wealthy farmer pays Rs.1 lakh for a piece of land in his village.
3. A cricket fan bets Rs.100 on the outcome of a test match in England.
4. A government officer buys ‘units’ of Unit Trust of India worth Rs 4,000.
5. A college professor buys, in anticipation of good return, 100 shares of Reliance
Industries Ltd.
6. A lady clerk deposits Rs.5, 000 in a Post Office Savings Account.
7. Based on the rumor that it would be a hot issue in the market in no distant future,
our friend John invests all his savings in the newly floated share issue of Fraternity
Electronics Ltd., a company intending to manufacture audio and video magnetic
tapes to start with, and cine sound tapes at a later stage.
1.7.2 Is there any common feature to all these investments?
A common feature of all these transactions is that something is sacrificed now for the
prospects of gaining something later. For example, the wealthy farmer in transaction
2 sacrifices Rs.1 lakh now for the prospects of crop income later. The lady clerk in transaction
6 sacrifices Rs.5,000 now for the prospect of getting a larger amount later due to interest
earned on the savings account. Thus, in a broad sense, all these seven transactions qualify
as investment.
Lets now understand the classification of various investment alternatives.
1.8 Fixed Deposits
The term “fixed” in fixed deposits denotes the period of maturity or tenor. Fixed Deposits,
therefore, pre-supposes a certain length of time for which the depositor decides to
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keep the money with the bank and the rate of interest payable to the depositor is
decided by this tenor. The rate of interest differs from bank to bank and is generally
higher for private sector and foreign banks. This, however, does not mean that the depositor
loses all his rights over the money for the duration of the tenor decided. The deposits
can be withdrawn before the period is over. However, the amount of interest payable
to the depositor, in such cases goes down (usually 1% to 2% less than the original
rate). Moreover, as per RBI regulations there will be no interest paid for any premature
withdrawals for the period 15 days to 29 or 15 to 45 days as the case may be.
Things that we should look into:- Things to look out for....
• Credit rating/ reputation of the group
• The rating is possibly the best way to judge the credit worthiness of a company.
However, for manufacturing company deposits, it is not mandatory to get a rating.
In such cases, it is better to check the size and reputation of the company or the
industrial group it belongs to.
• Interest rate
• Within the same safety level (or rating), a higher interest rate is a better option.
The difference in some cases can be as high as 1%.
• Diversify
• The portfolio principle applies to company deposits also. It is always better to spread
deposits over different companies and industries so as to reduce risk.
• Period of deposit: The ideal period for a company deposit is 6 months to one year
as it offers the liquidity option. Also, it gives an opportunity to review the company’s
performance.
• Periodic review of the company: As your principal and interest rests in the hand
of the company, it is advisable to review the company’s performance periodically.
Where Not To Invest?
• Companies that offers very high rates of interest, say 16% or above, when others
are offering 12-13%.
• Companies with poor cash flows.
• Avoid unincorporated companies/ private limited companies, as it is difficult to judge
their performance in absence of information.
• Companies with accumulated losses on their balance sheets.
• Companies with a poor dividend paying record.
Coclusion:- I would suggest doing good research by self is the best way to learn how to finance our growth.