Methods of Raising Finance for Business

The methods of financing should be adjusted to the stage or phase of the trade cycle. The total capital shall be raised by different means, or what is sometimes called “geared”, according to the phase of the cycle.

Different types of securities may be issued in certain proportions, an what ratio will each type bear to the total capital will depend upon the particular phase. For example, in the beginning of an optimistic expansion, debentures may be offered to good advantage. At a later time, when speculative enthusiasm is strong, shares will yield better returns. During depression short time borrowing can be resorted to, if the credit of the company is good. The financing plan may be adjusted to the conditions of the market an the security market by varying the proportion, rate of yield, term denominations and guaranteed rights of the securities issued.

The sources of finance for an enterprise can be many and diverse. In the case of an individualistic concerns, the chief source of finance is the individual proprietor or proprietors as in a partnership or a Joint Hindu family business. This may be supplemented by borrowed money in varying amounts according as the credit of the concern is good or poor. Since the capital requirements are comparatively small, there are hardly any financial problems controlling individual enterprise. But major or large-scale industries, which are mainly run by joint-stock-companies, require vast amounts of capital, an must therefore resort to all sorts of methods for raising the necessary funds. The main sources of finance in India may be classified as:-

1. Individual investment, only in the case of individualistic concerns.

2. Issue of shares of different kinds.

3. Issue of bonds and debentures.

4. Public deposits.

5. Managing agents.

6. Loans from joint-stock banks and indigenous bankers.

7. Gradual development method of using profits to increase capital sometimes called ‘ploughing back’ of earnings.

8. The State.

Financing of Fixed Capital

The finance for fixed capital by our major or large-scale industries is raised at present through

(1) Share capital
(2) managing agents
(3) Public deposits
(4) Debentures
(5) The State-loans from the Industrial Finance Corporation of India and State Finance Corporations.

Financing of Working Capital

The working capital of industries may be raised in three ways

(1) by resorting to borrowing
(2) by issue of additional securities
(3) by re-investment of earnings.
(4) managing agents
(5) public deposits
(6) issue of securities-shares or debentures
(7) loans from joint-stock banks
(8) loans from indigenous bankers and big financiers.

Financing of Extensions and Improvements

The financing of extensions and improvements is very important in the case of Indian industries, particularly at the present juncture, because of war period arrears and because of the need for development.

The sources of finance for these are:

(1) re-investment or “ploughing back” of profits
(2) issue of securities, either shares or debentures of both
(3) managing agents
(4) public deposits
(5) the State-loans from the Industrial Finance Corporation of India and Stat Finance Corporations.

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