Unit IV

Financial services

4.1 Asset/fund based Financial services - lease finance, consumer credit and hire purchase finance, factoring definition, functions, advantages, evaluation and forfeiting, bills discounting, housing finance, venture capital financing

Lease finance

Leasing is a contract that gives one person (called a tenant or lessee) the right to own the property of another person (called a landlord or lessor), except for the owner's landlord. It is a lease contract between the landlord and the tenant. The relationship between a tenant and the landlord is called a tenant, and the rights owned by the tenant are sometimes called land lease rights. The lease term is a fixed term (called the lease term), but it may end earlier. The consideration for the lease is called the rent or rent.

Meaning of lease

Leasing is the process by which a company can obtain the use of a particular fixed asset for which a set of contractual, periodic tax deductible payments must be made. The lessee is the recipient of the service or asset under the lease agreement and the lesser is the owner of the asset. The relationship between the tenant and the landlord is called tenancy and can be fixed term or indefinite (called lease term). The consideration for the lease is called the rent.

Finance lease

A finance lease is a contract primarily for financing equipment / assets through a lease contract. The owner's lessor transfers virtually all risks and rewards associated with ownership of the asset to the lessee (except for the title of the asset). In such a lease, the lender is just a funder and usually has no interest in the asset. These leases are also called "full payout leases" because the lessor can recover and profit from the investment in the lease. Finance leases are primarily for equipment / assets whose full useful life / economic life is typically used by one user (ship, aircraft, wagon, etc.).

Finance lease agreements typically come with the option of transferring ownership to the lessee at the end of the lease term.

Lease terms are usually a major part of the economic life of an asset.

Consumer credit and hire purchase finance

What is consumer credit?

Consumer credit, also known as consumer debt, is the credit provided to an individual to purchase a product or service. Consumer credit, most commonly associated with credit cards, also includes other credit lines, including some loans.

Deeper definition

There are two types of consumer credit: revolving credit and instalment payments. With revolving credits, a specified amount of credit is approved and can be used whenever needed, like a credit card.

Instalments make a specified number of fixed payments until the loan is repaid.

Consumer credit usually covers important products, such as electronic devices such as vehicles and televisions, which are usually rapidly depreciating products. Excludes investment purchases such as stocks, bonds and real estate.

Mortgages are not considered consumer credit because the purchase of real estate is considered an investment and the purchased real estate is considered an asset.

Regardless of whether you have an instalment payment or a revolving account, there are usually charges associated with the use of consumer credit. In either case, the person usually pays interest if there is a balance and a late fee if the payment is not made on time.

Consumers also typically have to pay a minimum monthly balance for their balance. In the case of instalments, items may be returned if you do not pay, or you may incur penalties if you do not pay the agreed amount.

Want to know how long it will take to repay your credit card balance? Use this calculator to find out.

Hire purchase finance

Employment purchases (HPs) or leases allow a company or individual to own and manage an asset during an agreed period while paying rent or installments to cover the depreciation of the asset and interest to cover the cost of capital. It is a kind of asset finance.

An asset is defined as having monetary value owned by a company or individual. Assets on a company's balance sheet may include tangible assets such as inventory, equipment and real estate, as well as intangible assets such as property rights and goodwill.

Leasing differs from term lending in that the lessee does not own the property. At the end of the lease, the lessee usually has the option of extending the lease, returning the asset, or referencing the purchaser of the asset. Some lessors have the right to refund 95% of the sale price when they refer the buyer. The amount of repayment depends on the contract between the original borrower and the borrower.

HP is a financial solution suitable for companies that want to buy assets without paying the full amount immediately. The customer pays the first deposit and the remaining balance and interest are paid over a period of time. Upon completion, ownership of the asset will be transferred to the customer.

It is important to note that the accounting and tax treatment of leases depends on the type of lease. For example, a finance lease is accounted for as a loan that funds an asset, so tax treatment follows the legal form of a transaction that is the employment of an asset. More specifically, the treatment of capital deductions is different and tax treatment must be taken into account when deciding how to finance an asset purchase.

General use

The use of HP or leasing is especially common in industries that require expensive machinery, such as construction, manufacturing, factory employment, printing, road freight, transportation, engineering, and professional services.

It is also used to finance other capital requirements of the business. For example:

Small item

Car

Copier.

Asset providers usually direct this type of linked finance.

Cost

There are two main costs to consider.

The interest rate charged for the loan. Rates are favorable for assets with high resale value (ie machinery, agricultural machinery, vehicles, etc.). Assets that are considered "soft" because of their low resale value (that is, printers, vending machines, office furniture, etc.) are not given very favorable rates.

Fees charged by the lender to meet the loan processing and management requirements. For example, cars purchased from HP may need to be serviced by pre-approved workshops on a regular basis.

Time frame

HP or leasing facilities can typically take up to a week to complete, depending on the size and complexity of the transaction.

Advantage

1. HP or leasing allows companies to manage and deploy their assets without significantly wasting working capital.
2. Fixed-rate financing makes budgeting easier because lessees have a clear picture of future spending.
3. The flexibility of the repayment structure can be used to enable seasonal business (eg annual repayments) and reduce monthly spending by taking into account "balloon" payments at the end of the period. ..
4. Leases prevent the risk of a rapid decline in the value of an asset and provide the flexibility to enter into a new contract at the end of the fixed term of the original lease.
5. Financing an asset purchase can be more tax efficient than a standard term loan because the lease payments are expensed. Depreciation of an asset also provides tax incentives, but the useful life of an asset depends on the asset and local regulations.
6. Financing is secured with leased assets and assets owned by lenders, providing high accessibility to corporate financing
7. In certain situations, there is maintenance included in the terms of the contract.

Disadvantages

1. Total HP or lease capital payments will be higher than the full amount of the asset purchase
2. Management complexity and costs are even greater if the contract applies to the arrangement-for example, renewals for equipment location changes.
3. If the business changes its strategy and as a result the leased asset becomes useless, early termination costs or sublease restrictions may occur.

Factoring definition

Factoring can be broadly defined by creating a relationship and agreement between a seller of goods / services and a financial institution called factoring. As a result, the latter purchases the former receivables and manages and manages the former receivables.

Factoring can also be defined as a continuous relationship between a financial institution (factor) and the business concerns of selling goods and / or providing services (clients) to trading customers on an open account basis. This causes Factor to purchase the client's books and debts (accounts receivable) with or without redemption to the client-thus managing the credits offered to the customer and also managing the sales ledger associated with the transaction. ..

The term "factoring" is defined in different ways in different countries due to the lack of unified codified legislation. A research group appointed by the Institute for Private International Law (UNIDROIT) in Rome in 1988, in a nutshell, recommended the following definition of factoring:

“Factoring means an arrangement between factoring and its clients and includes at least two of the following services provided by factoring:

1. Finance

2. Account maintenance

3. Debt recovery

4. Protection against credit risk.

However, the above definition applies only to factorization related to the supply of goods and services with respect to:

1. Transaction or professional debtor

2. Cross the border

3. When the debtor is notified of the transfer.

The development of the concept of factoring in various developed countries of the world has brought some consensus towards the definition of terms. Factoring can be broadly defined as an arrangement in which a claim arising from the sale of a product / service is sold to "factoring" and, as a result, ownership of the goods / service represented by that claim is passed to factoring. Therefore, Factor is responsible for all credit management, sales accounting, and debt collection from buyers.

Functions

Factor function:

Factors perform several functions for clients.

These functions are:

1. Ledger maintenance:

The factor keeps his client company's ledger. The invoice is sent from the client to the customer and a copy is marked as a factor. Clients do not have to maintain a separate ledger for their customers.

Based on the sales ledger, Factor reports the current status of accounts receivable to clients. It may also generate other useful information as part of receiving payments from customers and packaging. With the help of these reports, client companies can more effectively review their credit and collection policies.

2. Accounts receivable collection:

Under the factoring arrangement, factoring takes responsibility for collecting debt for his clients. Therefore, client companies are freed from the rigors of debt collection, allowing them to focus on improving their business purchasing, production, marketing and other management aspects.

With the help of trained personnel backed by infrastructure facilities, factors systematically implement follow-up measures and demand timely payments to debtors. Debtors are usually more sensitive to demands or reminders from factors because they do not want to lose the respect of the credit institution as a factor.

3. Credit management and credit protection:

Another useful service provided by the factor is credit management and protection. Whether he provides customers with credit to buyers, as a factor maintains an extensive record of information (usually computerized) about the financial position and credit rating of individual customers, as well as their payment performance. And that will extend the amount of credit and its duration.

In addition, this factor sets the credit limit for individual customers and indicates the extent to which they are ready to accept their customers' accounts receivable without relying on them. This professional service of Factor helps clients handle much more business with confidence than could otherwise be possible.

In addition, factor provides credit protection to the customer by purchasing all of the approved customer's debt (within the prescribed credit limits) and only if the customer is financially insolvent. Take the risk of default.

4. Advisory function:

Sometimes factors provide clients with specific advisory services. Thus, as a credit specialist, Factor is in a position to conduct a comprehensive study of economic conditions and trends and therefore advise clients on imminent development in their respective industries.

Many factors employ individuals who have extensive manufacturing experience and can advise on workload analysis, machine replacement programs, and other technical aspects of the client's business.

Factors also help clients select the right distributor / skilled talent through close relationships with various individuals and unfactored organizations.

Therefore, as a financial system that combines all relevant services, factoring provides a clear solution to the problems posed by working capital linked to trade debt.

Advantages,

Advantages of factoring

Here are some of the benefits of factoring services:

1. Alternative to Market Credit: Factoring plays an important role in working capital raising. Factoring replaces bank borrowing and complements market credit or supplier credit. Replaces expensive bank loans.
2. Time Savings: Factoring can save the company time and effort that would otherwise be spent collecting from customers. That energy can be devoted to other business building activities such as sales, marketing and customer development.
3. No mortgage required: Unlike traditional bank loans, factoring does not require you to take risks with your home or other property as collateral.
4. Reduced operating cycle time: Factoring significantly reduces the average receivable collection period, resulting in a reduced total client operating cycle time. This contributes to efficient working capital.
5. Liquidity: Factoring helps companies raise cash, even up to 90% of their immediate bill. This builds a liquidity position for the client.
6. Advisory Services: Factoring agencies provide clients with a variety of advisory services, including credit evaluation of overseas buyers.

Evaluation and forfeiting

What is Forfeiting?

Confiscation is a method of financing that lets in exporters to get hold of instantaneously coins via way of means of promoting medium- to long-time period money owed receivable (the quantity that importers pay to exporters) at discounted expenses via intermediaries. Exporters remove danger via way of means of promoting without reliance. We aren't answerable for the opportunity of the importer defaulting at the bond.

A confiscated individual is an person or organization that purchases a claim. The importer then can pay the quantity of the money owed receivable to the confiscated. Forfeiters are normally banks or economic organizations focusing on export finance.

How Forfaiting works

Purchases via way of means of confiscated money owed receivable facilitate exporters' bills and coins flows. The importer's financial institution normally ensures the quantity.

The buy additionally gets rid of the credit score danger related to promoting credit score to importers. Forfeiture enables transactions via way of means of importers who can not have enough money to pay the whole quantity of the products on the time of delivery.

The importer's receivables are transformed into debt certificate that may be freely traded withinside the secondary market. Receivables are normally withinside the shape of legally enforceable unconditional payments of alternate or promissory notes, for this reason supplying safety for debt confiscaters or next purchasers.

Pros and cons of confiscation

Advantage

Confiscation gets rid of the danger that the exporter will get hold of payment. This exercise additionally protects in opposition to credit score danger, switch danger, and danger posed via way of means of fluctuations in forex fees or hobby fees. Forfeiture simplifies transactions via way of means of changing credit score-primarily based totally income into coins transactions. This credit score-to-coins system presents dealers with instantaneously coins go with the drift and gets rid of series fees. In addition, exporters can get rid of money owed receivable (liables) from their stability sheets.

Forfaiting is flexible. The confiscated individual can tailor the provide to match the wishes of the exporter and adapt it to a number of global transactions. Exporters might also additionally use counterfeiting in preference to credit score or coverage insurance for sale. Forfeiture is beneficial in conditions wherein a rustic or a particular financial institution withinside the usa does now no longer have get admission to to an export credit score agency (ECA). This exercise lets in exporters to do commercial enterprise with customers in nations with excessive political danger.

Disadvantages

Forfeiture reduces the danger to exporters, however is usually greater costly and high-priced to export than financing via way of means of industrial lenders. These better fees are normally imposed on importers as a part of the usual price. In addition, simplest long-time period transactions over $ 100,000 are eligible for forfeiture, however postpay isn't always to be had for forfeiture.

There is a few discrimination whilst growing nations are involved in comparison to advanced nations. For example, simplest decided on currencies have global liquidity and are problem to confiscation. Finally, no global credit score organization can offer ensures to confiscated businesses. This loss of assure impacts long-time period confiscation.

Bills discounting

In addition to providing factoring services, banking financial institutions also offer bill discount facilities to fund their clients.

Bill discounting as a fund-based activity emerged as a profitable business for financial companies in the early 90's, demonstrating the diversification of activities in line with India's emerging financial scene.

According to the Indian Exchange Bills Act of 1881:

"A replacement invoice is a written document containing an unconditional order signed by the manufacturer, to pay a specific person, only a specific person, or its owner, or a specific amount to that order. Instruct.. "

Bills of exchange (B / E) are used to finance the transaction of commodities. So this is essentially a trade-related tool.

The following are the differences and similarities between services.

Differences / Differences

The two services differ from each other in the following ways:

Bill discount

1. It's financial preparation for the bill.

2. A prepayment will be made for the bill.

3. Withdrawals are responsible for collecting invoices and transferring revenue to financial institutions.

4. Discounted bills may be redistributed several times before maturity.

5. Invoice discounts are always reliable. That is, by default, the client must increase the loss.

6. Bill lending is individual transaction oriented. That is, each bill is evaluated individually for its benefits and purchased at a discounted price.

7. Building finance is always "balance sheet" finance. That is, both the amount of receivables and the bank credit are reflected on the client's balance sheet as current assets and current liabilities, respectively.

This is due to the "reliable" nature of the facility.

8. The addressee or invoice recipient is fully aware of the bank's claims for receivables arising from the sale of goods and services.

Factoring

1. Factoring provides all services such as ledger maintenance, advisory services, in addition to funding.

2. Trade debt is purchased by transfer.

3. Factoring promises to collect the client's invoice.

4. Debt purchased for factoring cannot be redistributed and can only be refinanced.

5. Factoring is possible with or without redemption.

6. In factoring, bulk is provided for some outstanding transaction invoices generated in batch. It follows the principle of "total sales".

7. Full Factoring Services Facilities have an "off-balance sheet" arrangement as client company’s complete double-entry bookkeeping by crediting the factoring of consideration.

8. Factoring services such as "private factoring" are inherently confidential. That is, the debtor is unaware of the arrangement. Therefore, it can be argued that large industrial homes using such facilities operate their own businesses without external financial support.

Similarity

1. Both provide short-term funding.

2. Both discount the accounts receivable that the client should have received from the buyer at the end of the credit period.

Housing finance

India's country wide housing coverage insists on offering greater housing to its citizens. It's simplest herbal that the authorities need to create a gadget that could offer housing finance.

At the worldwide level, establishments together with the World Bank and the Asian Development Bank offer each presents and loans, mainly tender loans for the elimination of slums and the introduction of residential colonies. In fact, in India, the World Bank has funded many country governments for webweb sites and carrier schemes, which concurrently inspire each housing and small enterprise promotion.

Benefits of housing finance

Within monetary services, housing finance creates employment, each at once and indirectly.

Industries together with cement, brick manufacturing, sanitary products, home equipment and glass industries are experiencing greater call for for domestic construction.

Rural housing prevents the motion of exertions now no longer simplest to rural regions however additionally to city regions.

Housing finance enables construct greater homes, ensuing in greater infrastructure centers together with roads, electricity technology and ingesting water centers.

Factories and business centers create townships via way of means of offering greater housing to their employees. This will assist housing finance ease city congestion.

For domestic finance, there may be vertical growth and reconstruction of dilapidated homes, and reworking of present homes.

Housing centers aren't simplest improved, in addition they replicate country wide culture. The metropolis of Chandigarh is an instance of a contemporary-day residence constructed via way of means of a French architect.

Non-traditional strength is enormous for contemporary-day housing equipment, that is one of the principal advantages of domestic finance.

Housing finance method

Commercial banks and co-operatives offer housing finance. Life Insurance Corporation is likewise collaborating withinside the housing finance competition.

The lender and the borrower offer a loan at the same time as concluding a settlement below the Real Estate Transfer Act. This lets in the residence to be constructed to be mortgaged to a creditor referred to as a mortgagee together with the land. The borrower is a loan and he can't promote the residence to a 3rd birthday celebration till the mortgage is repaid. In different words, the lender fees the borrower's property till the borrower repays the mortgage.

When the loan is repaid, the loan is cancelled and possession of the house is transferred to the proprietor. The proprietor has absolutely the proper to switch or promote to any birthday celebration of his choice. If you provide a loan to an present domestic for the motive of rebuilding or expanding, the house might be mortgaged via way of means of the lender till the mortgage is repaid.

Venture capital financing

Venture capital financing isn't smooth to get or near. Entrepreneurs are prepared to elevate budget with undertaking capital in the event that they apprehend the procedure, the phrases of the transaction, and the troubles which could arise. This article offers a top level view of undertaking capital financing.

1. Acquisition of undertaking capital finance

To apprehend the procedure of obtaining undertaking finance, it's miles critical to realize that undertaking capitalists typically attention on their funding efforts the use of one or extra of the subsequent criteria:

Specific business sectors (software, virtual media, semiconductors, cell, SaaS, biotechnology, cell devices, etc.)

Company level (early level seed or collection A spherical, or overdue level spherical with a corporation that has performed vast sales and traction)

Geography (eg San Francisco / Silicon Valley, New York, etc.)

Before drawing close a undertaking capitalist, attempt to examine if his or her attention is in step with your corporation and its level of development.

The 2d critical factor to apprehend is that VCs are frequently flooded with funding possibilities via one-sided email. Almost all of those junk emails are ignored. The exceptional manner to get the eye of undertaking capital is to make a heat referral via a relied on colleague, entrepreneur, or undertaking capital pleasant lawyer.

Startups want to have a good "elevator pitch" and a robust investor pitch deck to draw VC interest. For extra particular recommendation on this, see How to Use the Sample Pitch Deck to Create a Good Investor Pitch Deck for Financing Startups.

Startups additionally want to apprehend that the undertaking procedure may be very time consuming. Getting a assembly with a VC corporation most important can take weeks. More conferences and conversations continued. Then, we gave a presentation to all of the companions of the undertaking capital fund. After that, we are able to problem and negotiate time period sheets at the same time as persevering with due diligence. And finally, drafting and negotiations through legal professionals on each facets of severa felony files to show the funding.

The relaxation of this text discusses key troubles in negotiating and final undertaking capital rounds.

2. Venture capital time period sheet

Most undertaking capital financing is first documented through a "time period sheet" created through the VC corporation and provided to entrepreneurs. The time period sheet is critical as it indicates that VC agencies are taking their investments critically and need to continue with the very last due diligence selection and very last felony funding report. Most VC agencies were authorised through the funding committee earlier than the time period sheet is issued. Term sheets do now no longer assure that a transaction can be finished, however in our experience, a excessive percent of finished and signed term sheets completes financing.

Term sheets cowl all of the critical elements of financing. Economic troubles together with valuations given to a corporation (the better the valuation, the much less entrepreneurial dilution). Manage troubles together with the composition of the board and the forms of approval or "veto" rights loved through traders. Post-final rights of traders, together with the proper to take part in destiny financing and to attain everyday economic information.

Term sheets typically nation that they're now no longer binding, besides for positive provisions together with confidentiality and prohibition of shop / exclusivity. Although now no longer binding, the time period sheet is the maximum critical report for negotiating with traders. Almost all the critical troubles are protected through term sheets, leaving minor troubles which might be resolved withinside the investment files below. Entrepreneurs have to don't forget the time period sheet as a blueprint for his or her dating with traders and pay near interest to it.

There are special philosophies concerning the use and scope of time period sheets. One technique is to have a shortened quick time period sheet that covers handiest the maximum critical factors of the transaction. As such, it's miles alleged that after they negotiate a definitive investment report, the most important can attention on the primary troubles and go away aspect factors to the lawyer.

Another technique to term sheets is a long-shape technique that increases definitely any problem that calls for negotiation. This makes it quicker and less difficult to create and negotiate the very last documentation.

Venture capital has emerged as a new financial method for financing during the 20th century. Venture capital is capital provided by professional companies that invest with management in young, fast-growing or changing companies with high growth potential. Venture capital is a form of equity finance specifically designed to fund high-risk, high-paying projects.

There is a general perception that venture capital is a means of funding high-tech projects. However, venture capital is a long-term investment made for the following purposes:

1. A venture or venture promoted by an entrepreneur who is technically or professionally qualified but not proven

2. Ventures trying to take advantage of non-commercial proven technology, or

3. High-risk venture.

The term "venture capital" refers to a financial investment in a high-risk project aimed at achieving a high rate of return. The concept of venture capital is very old, but the government's recent liberalization policy seems to be revitalizing India's venture capital movement. In the truest sense, venture capital finance is one of the companies that has recently entered the Indian capital markets. With the increasing emergence of technocratic entrepreneurs who are short of risky capital, there is great potential for venture capital firms in Japan.

These venture capital firms provide entrepreneurs with the risk capital they need to meet the promoter contributions demanded by financial institutions. In addition to providing capital, these VCFs (Venture Capital Companies) are actively interested in guiding supporting companies.

Young tech companies that are in the early stages of financing and are not yet ready to publicly offer securities may seek venture capital. Such high-risk capital is provided to venture capital funds in the form of long-term equity financing, primarily in the hope of achieving a high rate of return in the form of capital gains. In fact, venture capitalists act as entrepreneurial partners.

Therefore, venture capitalists (VCs) may offer ideas, products, technology-oriented, or start-ups that have not been proven by seed capital. Venture capitalists may also invest in companies that cannot be funded in the traditional way.

Venture capital features

"Venture capital brings together the qualities of bankers, stock market investors and entrepreneurs."

The main characteristics of venture capital can be summarized as follows.

1. High risk: Venture capital represents a financial investment in a high-risk project aimed at achieving a high rate of return.

2. Equity Participation: Venture capital finance is always real or potential equity participation, and the purpose of venture capitalists is to increase capital gains by selling shares when the company makes a profit.

3. Long-term investment: Venture capital finance is a long-term investment. It generally takes a long time to monetize a venture capitalist's investment in securities.

4. Participation in management: In addition to providing capital, venture capital funds have a positive interest in managing supported companies. Therefore, the venture capital approach is different from the traditional lender and banker approaches. It is also different from ordinary stock market investors who only trade company stock without participating in management. It is correctly said that "venture capital is a combination of the qualities of a banker, a stock market investor, and an entrepreneur."

5. Achieving Social Goals: Unlike development capital provided by some central and state-level government agencies, profit goals are the motivation behind financing. However, venture capital projects have created jobs and indirectly balanced the growth of the region by launching successful new businesses.

6. Investment is fluid: Venture capital will not be repaid on demand as it is in overdrafts or on a loan repayment schedule. The investment is only realized when the company is sold or listed on the stock market.

Venture capital techniques

Venture capital firms are generally aware of two major stages in which they can invest in a venture:

1. Early stage financing:

(A) Seed Capital and R & D projects

(B) Startup

(C) Second round finance

2. Late financing:

(A) Development capital

(B) Extended finance

(C) Alternative capital

(D) Turnaround

(E) Buyout.

This stage includes:

1. Seed Capital and R & D Projects: Venture capitalists are often interested in providing seed finance. e. Providing a very small amount of funds necessary for commercialization. Before launching a product, you need to carry out research and development activities. Entrepreneurs often need external funding during product development. As the research phase moves to the development phase, financial risk gradually increases. During the development phase, product samples are tested before they are finally commercialized. “Venture capitalists / companies / funds are always ready to take risks and invest in such R & D projects. We promise higher returns in the future.

2. Startups: The most dangerous aspect of venture capital is the launch of new businesses after R & D activities are over. At this stage, the entrepreneur and his product or service have not yet been tried. The funds needed are usually lacking in his own resources. Start-ups may include new industries / businesses established by experienced people in a knowledgeable area. Others can arise from research institutes or large corporations where venture capitalists have industrial experience or participate with corporate partners. Yet other start-ups occur when a new company is driven by an existing company that does not have sufficient financial resources to commercialize the new technology.

3. Round 2 Financing: A stage where a product is already on the market but not profitable enough to attract new investors. Additional funding is needed at this stage to meet the growing needs of the business. Venture capital institutions (VCIs) provide more funding in the form of debt at this stage than in other early stages of financing. The investment timescale is typically 3 to 7 years.

Late loan

Established businesses that require additional financial support but are unable to raise funds through public issuance will approach venture capital funds for increased financing, buyouts and turnarounds, or development capital. ..

1. Development capital: Refers to the provision of funds to a company that has made a profit through a high-risk stage but cannot disclose it, so it needs financial assistance. Funds are required to purchase new equipment and plants, expand sales and distribution facilities, and launch products in new regions. The investment timescale is typically 1-3 years and falls into the medium risk category.

2. Expansion Finance: Venture capitalists need financing for expansion purposes, either by growth, which means larger factories, larger warehouses, new factories, new products, or new markets, or through the acquisition of existing businesses. We recognize that the risk of ventures is low. The investment period is usually 1 to 3 years. This represents the last round of funding before the planned end.

3. Buyout: Refers to the transfer of business management by establishing another business separately from the existing owner. There are two types.

(A) Management Buyout (MBO): A management buyout (MBO) is funded by a venture capital institution that allows current business managers / investors to acquire existing product lines / businesses. They represent an important part of VCI's activities.

(B) Management buy-in (MBI): A management buy-in is a fund provided to allow an external group of managers to purchase an existing company. This involves three parties: management, target companies, and investors (venture capital institutions). MBIs are less popular than MBOs because they are more risky and it is difficult for new management to assess the real potential of the target company. MBIs can usually target low-performing or poor-performing companies.

4. Alternative Capital: Another aspect of financing is to provide funding to purchase the owner's existing shares. This can be due to a variety of reasons, including personal financial needs, family conflicts, or the need to associate well-known names. The investment timescale is 1-3 years and the risk is low.

5. Turnaround: This form of venture capital finance includes medium to high risk and a 3 to 5 year timescale. It involves purchasing control of a sick company that requires highly specialized skills. You may need to rescheduling all of your company's debt, change management, or even change ownership. A very aggressive "practical" approach is needed during the first crisis, when venture capitalists may appoint their own chairman or appoint directors to the board.

In a nutshell, venture capital firms fund both early and late-stage investments to maintain a balance between risk and profitability. Venture capitalists evaluate technology and study potential markets, in addition to considering the ability of promoters to carry out projects while making early-stage investments. Later stages of investment will scrutinize new market and business / entrepreneurial records.

Key takeaways:

1. Leasing is a contract that gives one person (called a tenant or lessee) the right to own the property of another person (called a landlord or lessor), except for the owner's landlord.
2. Leasing is the process by which a company can obtain the use of a particular fixed asset for which a set of contractual, periodic tax deductible payments must be made.
3. A finance lease is a contract primarily for financing equipment / assets through a
4. Lease contract.
5. Consumer credit, also known as consumer debt, is the credit provided to an individual to purchase a product or service.
6. Employment purchases (HPs) or leases allow a company or individual to own and manage an asset during an agreed period while paying rent or installments to cover the depreciation of the asset and interest to cover the cost of capital.
7. The use of HP or leasing is especially common in industries that require expensive machinery, such as construction, manufacturing, factory employment, printing, road freight, transportation, engineering, and professional services.
8. Factoring can be broadly defined by creating a relationship and agreement between a seller of goods / services and a financial institution called factoring.
9. “Factoring means an arrangement between factoring and its clients and includes at least two of the following services provided by factoring:
10. Under the factoring arrangement, factoring takes responsibility for collecting debt for his clients.
11. Confiscation is a method of financing that lets in exporters to get hold of instantaneously coins via way of means of promoting medium- to long-time period money owed receivable (the quantity that importers pay to exporters) at discounted expenses via intermediaries.
12. Confiscation gets rid of the danger that the exporter will get hold of payment.
13. Bill discounting as a fund-based activity emerged as a profitable business for financial companies in the early 90's, demonstrating the diversification of activities in line with India's emerging financial scene.
14. Factoring provides all services such as ledger maintenance, advisory services, in addition to funding.
15. India's country wide housing coverage insists on offering greater housing to its citizens.
16. Commercial banks and co-operatives offer housing finance.
17. Venture capital financing isn't smooth to get or near.
18. Young tech companies that are in the early stages of financing and are not yet ready to publicly offer securities may seek venture capital.
19. Venture capital will not be repaid on demand as it is in overdrafts or on a loan repayment schedule.
20. A management buy-in is a fund provided to allow an external group of managers to purchase an existing company.

4.2 Fee-based / Advisory services: Stock broking, credit rating.

What is a financial service?

Financial services are services provided by banks and financial institutions in the financial system

In general, all kinds of activities with financial nature can be considered financial services. In a broad sense, the term financial services means the mobilization and allocation of savings. Therefore, this includes all activities related to the conversion from savings to investment.

The financial industry covers a wide range of organizations that handle the management of inflows and outflows of funds in the economy. Some of these organizations include asset management companies such as leasing companies, merchant bankers, debt management companies such as discount houses and acceptance houses, as well as banks, credit card companies, insurance companies, consumer finance companies and stock exchanges. There are general financial institutions and some government support agencies. Company.

Characteristics of financial services

1. Customer-centric: Financial services are usually customer-centric. Financial services are provided according to the needs of our customers. For example, an industrial customer may require leasing financial services, and a company issuing new shares in the market may require merchant bunker services.

Like other service companies, financial services companies are in constant contact with their customers so they can design products that meet their specific needs.

b.     Intangible assets: Financial services are essentially intangible assets. Brand image is very important in a highly competitive global environment. The image of a financial institution that provides financial products and services is good, and unless you enjoy the trust of your customers, you may not succeed.

c.      Ancillary: The production of financial services and the provision of these services must be ancillary. Both of these functions, the creation of new and innovative financial services and the provision of these services, are performed at the same time.

d.     Perishable nature: Like other services, financial services require a supply-demand match. Unable to save service. They must be supplied when the customer needs them.

e.     Human element control: Financial services are dominated by human element. Therefore, financial services are labor-intensive. Selling high-quality financial products requires talented and skilled personnel.

f.        Advisory: There are three types of financial services: fund-based, fee-based, or both. For paid services, the advisory function dominates. Issuance management, registrars, merchant banking, securities pricing, etc. are just a few examples of advisory financial services.

g.     Heterogeneity: Financial services are customized services. Not all clients can be unified. Financial services vary from client to client. Institutional investor requirements are different for individual clients. After analyzing the needs of the customer, the financial institution provides the customer with customized financial services.

h.     Information-based: The financial services industry is an information-based industry. This includes creating, distributing, and using information. Information is an integral part of the production of financial services.

Functions of financial services

Financial services meet the needs of individuals, institutions and businesses through a network of financial institutions, financial markets and financial products.

In essence, the orderly functioning of the financial system depends heavily on the scope and quality of financial services extended by financial intermediaries. Specifically, financial services perform the following functions for the orderly development of the economy:

Mobilization of funds: Financial services help mobilize funds from investors, individuals, institutions and businesses. These funds are mobilized through a variety of financial products such as stocks, bonds and mutual funds.

Effective use of funds: These financial services also help to make effective use of mobilized funds. Financial services help in this regard through services such as factoring, securitization and credit ratings. The services of credit rating agencies allow investors to make wise and informed decisions related to their investments. Similarly, Merchant Banking Services supports mergers and acquisitions of companies.

Risk Transformation: Financial services, such as insurance, help mitigate risk by transferring it to those who are more willing to take it.

Strengthening Economic Development: Financial services support the country's economic development by mobilizing and deploying funds. The ideal savings for an individual are directed to productive investment through financial services.

Price-based service

Fee-based financial services are services in which a financial institution operates in a specialized area and earns a significant amount of income in the form of fees, dividends, or business intermediaries. The main fee-based financial services are:

Managing capital issues according to SEBI guidelines

Arrange funds from financial institutions to meet project costs and working capital

Arrangement of capital and debt certificate placement with investment institutions

We support the process of obtaining approval for all governments and legislatures. ・ Portfolio management

Price-based / advisory services include:

1. Problem management
2. Portfolio management
3. Corporate counselling
4. Loan syndicate
5. Mergers and acquisitions
6. Capital restructuring
7. Credit rating
8. Stock brokerage, etc.

Stock Brokerage •

The process of investing in the stock market individually or through a broker is known as stock brokerage. • This is mainly done by opening the Demat account. • If done through a broker, he opens an account and assists in operations through online stock brokerage institution.

Stock Brokers

Stock broking is a service that provides individual and institutional investors with the opportunity to buy and sell stocks.

Over the last few decades, equity brokerage has evolved from physical paper documents and telephone transactions to online transactions. However, the stock buying and selling process is similar. You need access to the stock exchange books.

To trade on an exchange, you must be a member of the exchange or work at a member firm. Stock exchanges impose strict regulations on who can trade stocks directly in their books. As a result, most retail investors who wish to trade stocks trade through stock brokers.

There are several companies that choose to offer over-the-counter (OTC) shares, but these are still traded with brokers.

Credit Rating

Opinion on the issuer's future ability and legal obligation to pay the principal and interest of a particular fixed income security in a timely manner. • Expressed in the rating instrument – ​​securities opinion – form, in accordance with the 1999 credit rating agency rules. Standard symbol – assigned by credit rating agency – used by issuers of such securities.

What is a credit rating?

A credit rating is a credit rating agency's assessment of a borrower and, according to the loan agreement, determines whether the borrower can repay the loan on time. Needless to say, a good credit rating represents a good history of paying a loan on time in the past. This credit rating influences the bank's decision to approve loan applications at compassionate interest rates.

It is usually represented by an alphabetic symbol. It's a new concept in the Indian financial markets, but it's gradually gaining in popularity. This helps investors recognize the risks associated with lending money and fairly assess the creditworthiness of borrowers.

Importance of credit rating

The benefits of credit ratings are:

For money lending

Better investment decisions: Banks and lenders are reluctant to give money to high-risk customers. Credit ratings give you ideas about the creditworthiness of an individual or company (borrowing money) and the associated risk factors. By assessing this, they can make better investment decisions.

Security Guarantee: A high credit rating means a guarantee of the security of your money and means that you will be repaid on time with interest.

For the borrower

Easy Loan Approval: Due to its high credit rating, it is considered a low-risk / risk-free customer. Therefore, the bank will easily approve your loan application.

Compassionate interest rates: You need to be aware of the fact that all banks offer loans at a certain range of interest rates. One of the main factors that determines the interest rate on a loan you take is your credit history. The higher the credit rating, the lower the interest rate.

Key takeaways:

1. Financial services are services provided by banks and financial institutions in the financial system
2. The financial industry covers a wide range of organizations that handle the management of inflows and outflows of funds in the economy.
3. Financial services are essentially intangible assets.
4. Financial services meet the needs of individuals, institutions and businesses through a network of financial institutions, financial markets and financial products.
5. Financial services help mobilize funds from investors, individuals, institutions and businesses.
6. Fee-based financial services are services in which a financial institution operates in a specialized area and earns a significant amount of income in the form of fees, dividends, or business intermediaries.
7. Stock broking is a service that provides individual and institutional investors with the opportunity to buy and sell stocks.
8. Opinion on the issuer's future ability and legal obligation to pay the principal and
9. Interest of a particular fixed income security in a timely manner
10. A credit rating is a credit rating agency's assessment of a borrower and, according to the loan agreement, determines whether the borrower can repay the loan on time.
11. Banks and lenders are reluctant to give money to high-risk customers.
12. One of the main factors that determine the interest rate on a loan you take is your credit history.

Reference:

1. Dam, B.B., Choudhury, R.N., Nag, R & Dam, L.B. Company Law, Gayatri
2. Publications, Guwahati, Assam (2020).