Unit IV

Financial Services

Q1) What do you mean by lease finance?      5

A1) Leasing business assets is a fairly common practice in modern times. In this regard, it is essential to understand the fact that there are two broad categories of leasing commonly used in today's business dynamics. These are called operating leases and finance leases. Both of these lease types have different capabilities and are used in different capacities depending on the basic requirements of the company.

The leasing process carries some risk. You can reduce this risk, but you cannot eliminate it altogether. A finance lease is considered a lease in which all risks and rewards that exist in connection with ownership of the asset are simply transferred to the lessee. In other words, the lessee tends to be the owner of the asset, so all risks that may be associated with the ownership of a particular asset are to be borne only by the lessee.

What is a Finance Lease Index?

It turns out that it is important to pay attention to the terms and conditions stated in the lease agreement, especially the terms of the lease itself, in order to determine the type of lease that applies to a particular cause. These indicators that help determine leasing contracts are primarily in the area of ​​risk and compensation related to the process. Subsequent descriptions of these lease indicators are given below.

Economic useful life: As far as the economic useful life is concerned, a financial lease is extended over a period that covers almost or almost all of the economic useful life of the asset. For example, if an asset has a useful life of 10 years, a financial lease agreement would be equivalent to a holding period of 7.5 years or more.

Maintenance Costs: During the term of the financial lease, the lessee tends to be solely responsible for all repair and maintenance costs that may occur as a result of holding and maintaining the assets.

Capitalization: The asset is to be capitalized in his books, regardless of the fact that the organization that leased the asset (ie the lessee) does not pay the down payment instead of buying the asset. This means that all assets and liabilities should be recorded in the lessee's books as if the assets were actually raised by the lessee.

Lease Fee: At the start of the lease, it is important that the present value of the lease fee is the fair value of the relevant asset.

By default, the lease agreement requires you to transfer ownership of the asset to the lessee at the end of the lease.

The leased asset must be of a special nature.

The lessee should have the option to purchase the asset at a price that is expected to be lower than the existing fair value on the day the option becomes exercisable.

Q2) Write a short note on consumer credit.      5

A2) 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.

Q3) What is Hire purchase? What are its advantages and disadvantages? 8

A3) Employment purchases (HPs) or leases allow a company or individual to own and manage an asset during an agreed period while paying rent or instalments 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 favourable for assets with high resale value (i.e. 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 favourable 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 (e.g. 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.

Q4) What is factoring? What are its functions?     8

A4) 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.

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 unfiltered 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.

Q5) What is forfeiting? How does it work?      5

A5) 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 Forfeiting 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 cannot 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 within side the secondary market. Receivables are normally within side the shape of legally enforceable unconditional payments of alternate or promissory notes, for this reason supplying safety for debt confiscators or next purchasers.

Q6) What are the advantages and disadvantages of forfeiting?  5

A6) Benefits of forfeiting

1. Provide liquidity and improve cash flow.

2. Working capital is not locked because the exporter is funded by a confiscated bank.

3. Eliminate political, transfer and currency risks.

4. The possibility of bad debts caused by the inability of the importer or guarantee bank to pay is completely eliminated.

5. Confiscation is a great tool for exporters who want to expand their sales in the international market.

6. For international finance, it acts as a protection tool. This is a better tool than insurance, mainly because it provides cash to exporters at the time of shipment.

7. In countries with high protection against credit, economic and political risks, confiscation can be a very reliable tool for exporters.

8. The risk of debt repayment delays is eliminated, and the risk of currency fluctuations and interest rates is also eliminated.

Below are some of the disadvantages of forfeiting.

1. Postpaid capital goods cannot be confiscated, especially if the importer is exporting postpaid capital goods.

2. There is discrimination between Western countries and Southern Hemisphere countries (South Asian, African and Latin American countries).

3. No international credit institution can guarantee a confiscated company that will affect long-term confiscation.

4. Only the selected currency enjoys international liquidity and will be confiscated.

Q7) What is bill discounting?       5

A7) Invoice discounts, also known as invoice discounts, are the process of effectively selling an invoice to a bank or similar entity for a small amount below par and before the maturity date associated with the exchange invoice. The debtor bids for payment to the new owner of the originally agreed full discount invoice. This approach allows the invoice issuer to receive cash before the actual due date associated with the invoice. Buyers can also make a modest profit from the cash advances provided to the invoice creator.

One of the easiest ways to understand how invoice discounts work is to consider the exchange invoices that ABC Company has issued to its client, XYZ Company. ABC Company has decided to monetize unpaid invoices so that the revenue can be used immediately rather than later. To this end, ABC approaches banks by offering to sell invoices at 90% of face value. The bank examines the transaction and determines that the transaction is feasible. Once approved, ABC will receive 90% of the face value of the invoice and instruct XYZ Company to send the payment to the bank. When the bank receives the full payment from XYZ, the transaction is considered complete.

There are several factors to consider before a financial institution chooses to start a bill discount transaction. It is related to the degree of risk associated with the purchase. This usually means assessing the debtors involved to determine the degree of risk that he or she will settle the bill late or default the debt altogether. The time remaining before the bill is due is also a consideration, and financial institutions prefer to shorten the time between purchasing an item and receiving the full amount. If the financial institution determines that the degree of risk involved is acceptable, the transaction is completed and the drafter of the bill of exchange is compensated at the agreed percentage of the total face value of the bill.

Part of the invoice discount process involves creating a contractual arrangement between the seller and the buyer of a commercial invoice. Generally, the terms of the contract also include provisions that identify the percentage paid to the seller and protect the buyer if the invoice is not paid according to the terms. This may include late charges and other charges. Also, if the debtor defaults on the outstanding balance, the seller may eventually be obliged to pay the full amount of the bill discount obligation.

Q8) What is the difference between bill discounting and factoring?  5

A8) Definition of bill discount

Bill discount is the process of trading or selling a bill of exchange to a bank or financial institution at a price lower than its par value before the bill matures. Bills of exchange discounts are based on the time remaining to maturity and the risks associated with it.

First of all, banks satisfy themselves with regard to the reliability of withdrawals before advancing money. When satisfied with the creditworthiness of the withdrawal, the bank will give the money after deducting a discounted rate or interest. When a bank purchases a customer's invoice, the bank becomes the owner of each invoice. If the customer delays payment, he must pay interest according to the prescribed interest rate.

In addition, if the customer fails to pay the invoice, the borrower shall bear the same liability and the bank may exercise the pony's rights to the goods offered to the customer by the borrower.

Definition of factoring

Factoring is a transaction in which a customer or borrower sells its book debt to factoring (financial institution) at a discounted price. After purchasing accounts receivable, factor finance, money to them after deducting:

Appropriate margin (spare)

Interest on financial services

Supplementary service fees.

Here, the client instructs the customer to transfer the collection to the financial institution or transfer the payment directly to the factor to settle the membership fee for the balance. Banks provide clients with the following services: credit checks, debtor ledger maintenance, debt collection, debtor credit reports, and more.

The types of factoring are:

1. Disclosure Factoring: All parties are aware of the factoring arrangements.
2. Private Factoring: The parties are unaware of the factoring arrangements.
3. Recourse Factoring: In case of customer default, the borrower pays the amount of bad debt.
4. Non-recourse factoring: The fee rate is high because the factoring itself bears the amount of bad debt.

Key differences between invoice discounts and factoring

The main differences between invoice discounts and factoring are:

1. Selling invoices at a discount to a bank before maturity is known as an invoice discount. Selling a debtor to a financial institution at a discounted price is factoring.
2. The invoice will be discounted and the full amount will be paid to the borrower at the time of transaction. Conversely, the largest portion of the amount is offered as a prepayment and the remaining amount is offered as a balance when the membership fee is realized.
3. The parties to the billing discount are withdrawals, addressees, and beneficiaries, while the parties to factoring are factoring, debtors, and borrowers.
4. Invoice discounts are always reliable. That is, if the customer fails to pay the debt, the payment will be made by the borrower. Factoring, on the other hand, can be redeemed or non-redeemed.
5. The Negotiable Commodity Act of 1881 contains rules for discounting bills. This is in contrast to factorization, which is not included in any action.
6. With invoice discounts, the lender receives a discounted rate on the financial services, but with factoring, factoring receives interest and fees.
7. Factoring allocates debt that is not covered by bill discounts.

Q9) Write a short note on housing finance.     5

A9) 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.

Q10) What is venture capital? What are its features?      8

A10) 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.

Q11) What are the techniques of Venture Capital?    5

A11) 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.

Q12) What is a financial service? What are its features?   5

A12) 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.

Q13) What is a credit rating?       5

A13) The term credit rating is a general term or refers to a quantified assessment of a borrower's creditworthiness with respect to a particular debt or financial debt. Credit ratings can be assigned to any entity that wants to borrow money, such as an individual, a business, a state or local authority, or a sovereign government.

Individual credits are scored on a 3-digit number scale by credit bureaus such as Experian, Equifax and TransUnion using the Fair Isaac Corporation (FICO) credit scoring format. Corporate and government credit ratings and valuations are typically conducted by credit rating agencies such as S & P Global, Moody's and Fitch Ratings. These rating agencies are paid by entities seeking credit ratings for themselves or one of their debt problems.

Understand credit rating

Loans are debts, promises in nature, and often contractual. The credit rating determines the borrower's willingness and ability to repay the loan within the scope of the contract without default.

An individual's credit rating influences the likelihood of approval of a particular loan and the favorable terms of that loan. A high credit rating indicates that you are likely to repay the entire loan without problems, and a low credit rating indicates that the borrower has had problems repayment of the loan in the past and may follow the same pattern in the future.

Credit rating and credit score

Credit ratings apply not only to individuals, but also to businesses and governments. For example, a sovereign credit rating applies to a national government, but a corporate credit rating applies only to a business. Credit scores, on the other hand, apply only to individuals.

Credit scores are derived from the credit history maintained by credit reporting agencies such as Equifax, Experian and TransUnion. An individual's credit score is usually reported as a number in the range 300-850 (see Factors Affecting Credit Ratings and Credit Scores for more information).

The short-term credit rating reflects the potential for the borrower to default within a year. This type of credit rating has become commonplace in recent years, but in the past long-term credit ratings have been more important. The long-term credit rating predicts the potential for a borrower to default at any point in the long-term future.

Credit rating agencies usually assign letter grades to indicate a rating. For example, S & P Global's credit ratings range from AAA (Excellent) to C and D. Debt securities with a rating of less than BB are considered speculative grade or junk bonds. In other words, it is more likely to be the default.

Q14) Write the importance of credit rating. Write the process of credit rating.                                                                                                                                                          8

A14) 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.

Credit rating process

These are the nine steps in the credit rating process.

1. Issuing a formal request
2. Analysis team assignment
3. Obtaining financial information
4. Survey and management meetings
5. Discussion meeting
6. Final evaluation meeting
7. Notification of assigned rating
8. Announce to the public
9. Company monitoring

1. Issuing a formal request

The credit rating process begins when the issuer (who wants to obtain a credit rating) issues a formal request for a credit rating to a credit rating agency. That is, CRISIL. When the credit rating agency accepts the request. An agreement has been reached between the issuing company and the rating agency.

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The terms and conditions cover the following aspects:

1. A CRA (credit rating agency) is required to maintain the confidentiality of company information.

2. The issuing company has the right to accept or not accept the rating.

3. The issuer must provide the CRA with genuine materials and information for rating.

2. Assignment of analysis team

In the second step, the credit rating agency (CRA) assigns credit rating duties and obligations to the analytics team. The analytics team is responsible for project / assignment evaluation. Teams typically have two members / analysts with expertise in the relevant business area.

3. Obtain financial information

In this case, the analytics team collects all the necessary information from the client or issuer. The analysis team provides the issuer with the necessary information and a list of discussion plans.

The analytics team analyzes information related to financial statements, cash flow forecasts, and other relevant information.

4. Investigation and meeting with management

In this step, the analytics team visits the company's factory or factory to investigate the client's operations and meet with company executives to gain a better understanding. This includes understanding and collecting the key factors that affect production levels, quality, and production costs.

Direct meetings with issuer management are maintained to allow CRAs (credit rating agencies) to incorporate and disclose non-public information in rating decisions and to look forward to ratings. Increase.

5. Discussion meeting

After all analysis is complete, the team will discuss the findings in detail with an internal committee of senior analysts from credit rating agencies. All issues affecting the company are identified. Opinions about ratings are also formed. The results of the team's analysis are finally presented to the highest authority of the evaluation committee.

6. Final evaluation meeting

This is the final authority meeting for assigning ratings and the analysis team is done. The rating committee is the only process in which the issuer does not participate directly.

The ultimate authority now checks for facts, findings, and factors such as political, social, and other factors. After reviewing all results, facts, and other information, the credit rating agency assigns the actual credit rating.

7. Notification of assigned rating

After assigning a rating grade, the CRA informs the issuer why they support the rating and credit rating. The issuer can now accept, reject, or provide additional facts to reconfirm it. Credit ratings rejected by the issuer are kept confidential and should not be made publicly available.

8. Announce to the public

Once the issuer accepts the rating, the credit rating agency distributes the rating to the public through printed reports, newspapers, and more.

9. Company monitoring

If the company decides to accept the rating, the CRA is obliged to monitor the accepted rating over the life of the equipment or based on the time stated at the time of contract. The CRA should constantly monitor all ratings with reference to new political, economic and financial developments and industry trends.

All this information is checked regularly to find major changes. If there is a change in the credit rating, the CRA will publish the updated rating through a printed report in the newspaper.

Q15) Write a short note on stock broker.     5

A15) A stock broker is a professional trader who buys and sells stock on behalf of a client. Stock brokers are also known as registered representatives or investment advisers.

Most stock brokers work for brokerage firms and handle transactions for many individual and institutional clients. Remuneration methods vary by employer, but stock brokers are often paid on a commission basis.

Brokerage firms and broker dealers are sometimes referred to as stock brokers. This includes both full-service brokers and discount brokers who execute transactions but do not offer individual investment advice.

Most online brokers are discounted brokers, at least at the basic service level, and transactions are carried out for free or with a small set price fee. Many online brokers now offer premium level services at higher fees.

Understand the role of stock brokers

To buy or sell stock, you need access to one of the major exchanges, such as the New York Stock Exchange (NYSE) and NASDAQ. To trade on these exchanges, you must be a member of the exchange or belong to a member firm. Member firms and many individuals working for them are licensed as brokers or broker-dealers by the Financial Industry Regulatory Authority (FINRA).

It is possible for a retail investor to buy shares directly from the company that issues the shares, but it is much easier to work with a stock broker.

Until recently, accessing the stock market has been exorbitantly expensive. It was only cost effective for high net worth investors or large institutional investors such as pension fund managers. They used a full-service broker and were able to pay hundreds of dollars to execute a transaction.

However, the rise of the Internet and related technological advances have paved the way for discount brokers to offer online services with cheap, fast, automated access to the market. Recently, apps such as Robinhood and SoFi have been offered to micro-investors, and stock split purchases are also possible. Most accounts on the market today are managed by account holders and held by discount brokers.

Brokers employed by discount broker companies can work as telephone agents available to answer simple questions or as branch officers in physical locations. We may also consult with clients who are subscribed to the premium tier of online brokers.

A relatively small number of stock brokers work for investment banks and specialized brokerage firms. These companies process large, professional orders for institutional investors and high net worth individuals.

Another recent development of broker services is the introduction of robo-advisors. This is an algorithmic investment management performed through the interface of a web or mobile app. Personal interactions are minimal and charges can be kept low.

Educational requirements for stock brokers

Stock brokers usually require a bachelor's degree in finance or business administration. A deep understanding of financial law and regulation, accounting methods, economic and currency principles, financial planning and forecasting will all help you work in this area.

Most successful stock brokers have exceptional interpersonal skills and can maintain strong sales relationships.

Stock broker license requirements

Every country has its own eligibility requirements for stock brokers.

In the United States, registered brokers must hold FINRA Series 7 and Series 63 or 66 licenses and be sponsored by a registered investment company. US floor brokers must also be members of the stock exchange on which they work.

In Canada, potential stock brokers are currently employed by brokerage firms and have completed the Canada Securities Course (CSC), Action and Practice Handbook (CPH), and 90-day Investment Adviser Training Program (IATP). Need to do it.

In Hong Kong, the applicant works for a licensed brokerage firm and must pass three exams from the Hong Kong Securities Association (HKSI). Those who pass the exam must be approved by a financial regulator to obtain a license.

In Singapore, you must pass four exams, Modules 1A, 5, 6 and 6A, managed by the Institute for Monetary and Banking Finance to become a trading representative. The Monetary Authority of Singapore (MAS) and the Stock Exchange of Singapore (SGX) are licensed.

In the UK, equity brokerage is tightly regulated and brokers are required to qualify from the Financial Conduct Authority (FCA). The exact eligibility depends on the specific obligations required of the broker and employer.

Global credentials are also increasingly sought after as a signal of legitimacy and financial insight. Examples include the designation of a Certified Financial Planner (CFP) or Chartered Financial Analyst (CFA).