7/30/2019 1pb11mba31 Afm
1/16
P E S Institute of Technology
Department of MBA
100 Feet Ring Road, BSK III Stage, Bangalore560 085
A TERM PAPER
On
Long Term Financing for Working Capital
Submitted in fulfillment of the requirements for the 3rd SEM
MBA
ADVANCE FINANCIAL MANAGEMENT
Submitted to : Submitted By :
Prof. GV Sharma Soujanya.N
Dept Of MBA 1PB11MBA31
7/30/2019 1pb11mba31 Afm
2/16
Introduction
There are many reasons why a company may require long term financing,
such as if a failing company is confident that it will recover its loss by the next
fiscal year, a growing company that needs financing to expand its business,
working capital required to meet the customers huge order, etc.
Long term financing is normally desired by company running low on
their capital deficit business fund. The term of finance is more than a year, and
depending on the type of the company, non-Corporations are limited to using
debt finance while Corporations can use both debt and equity products in theirlong term financing strategies.
Objectives
Explain the meaning and purpose of long term finance. Identify the various sources of long term finance. Discuss the merits and demerits of long term borrowing from commercial
banks.
Long Term Finance Meaning
A business requires funds to purchase fixed assets like land and building, plant and
machinery, furniture etc. These assets may be regarded as the foundation of a
business. The capital required for these assets is called fixed capital. A part of the
working capital is also of a permanent nature. Funds required for this part of the
working capital and for fixed capital are called long term finance.
7/30/2019 1pb11mba31 Afm
3/16
Purpose of long term finance:
Long term finance is required for the following purposes:
1. To Finance fixed assets: Business requires fixed assets like machines,Building, furniture etc. Finance required to buy these assets is for a long
period, because such assets can be used for a long period and are not for
resale.
2. To finance the permanent part of working capital: Business is a continuingactivity. It must have a certain amount of working capital which would be
needed again and again. This part of working capital is of a fixed or
permanent nature. This requirement is also met from long term funds.
3. To finance growth and expansion of business: Expansion of businessrequires investment of a huge amount of capital permanently or for a long
period.
Factors determining long-term financial requirements :
The amount required to meet the long term capital needs of a company depend
upon many factors. These are:
(a) Nature of Business: The nature and character of a business determines the
amount of fixed capital. A manufacturing company requires land, building,
machines etc. So it has to invest a large amount of capital for a long period. But a
trading concern dealing in, say, washing machines will require a smaller amount of
long term fund because it does not have to buy building or machines.
7/30/2019 1pb11mba31 Afm
4/16
(b) Nature of goods produced: If a business is engaged in manufacturing small and
simple articles it will require a smaller amount of fixed capital as compared to one
manufacturing heavy machines or heavy consumer items like cars, refrigerators
etc. which will require more fixed capital.
(c) Technology used: In heavy industries like steel the fixed capital investment is
larger than in the case of a business producing plastic jars using simple technology
or producing goods using labour intensive technique.
Sources of long term finance
The main sources of long term finance are as follows:
1. Shares:These are issued to the general public. These may be of two types: (i) Equity
and (ii) Preference. The holders of shares are the owners of the business.
2. Debentures:These are also issued to the general public. The holders of debentures are the
creditors of the company.
3. Public Deposits :General public also like to deposit their savings with a popular and well
established company which can pay interest periodically and pay-back the
deposit when due.
4. Retained earnings:The company may not distribute the whole of its profits among its
shareholders. It may retain a part of the profits and utilize it as capital.
7/30/2019 1pb11mba31 Afm
5/16
5. Term loans from banks:Many industrial development banks, cooperative banks and commercial
banks grant medium term loans for a period of three to five years.
6. Loan from financial institutions:There are many specialized financial institutions established by the Central
and State governments which give long term loans at reasonable rate of
interest. Some of these institutions are: Industrial Finance Corporation of
India ( IFCI), Industrial Development Bank of India (IDBI), Industrial
Credit and Investment Corporation of India (ICICI), Unit Trust of India (
UTI ), State Finance Corporations etc. These sources of long term finance
will be discussed in the next lesson.
7/30/2019 1pb11mba31 Afm
6/16
Punjab National Bank
Credit is provided for: Financing stock in trade, book debts and other assets to be usedin the trade.
Acquiring of assets for furnishing of shop & show room like
partition, fixture and furnishing etc, purchase of air-
conditioners, other gadgets and delivery van required for
running the business.
Eligibility i) Traders, who are individuals, firms, HUFs, cooperative
societies registered under any law relating to cooperative
societies and companies etc. Promoters /co-obligants must have
existing satisfactory relationship of minimum at least six month
with the Bank.
ii) Traders should comply with applicable statutory
requirements, such as State/Central Sales Tax RegistrationCertificate, Licence under Shops & Commercial Establishment
Act, Registration with Excise Department, etc.
iii) Advances against goods or any other item prohibited by
RBI/Govt. from time to time will not be covered under this
scheme.
Extent of Loan for Working
Capital
Term Loan: 70% of the cost of assets to be purchased with a
maximum of Rs.100 lac for Metro and Urban centre and Rs. 25
lac for SU and rural centre.
7/30/2019 1pb11mba31 Afm
7/16
Security Primary Security: Legally enforceable charge by way of
hypothecation/pledge/assignment, etc. on stocks/book
debts/fixed assets/block assets of the borrower;
Collateral Security- Legally Enforceable Equitable/Registered
Mortgage of IP / pledge or creation of charge on liquid security
having realizable/ surrender value equal to the amount of
loan/credit facilities;
Loans /limits up to Rs.5 lac, advance should be collaterally
secured by way of suitable third party guarantee.
Repayment Working capital limit upto Rs.5 lac granted by way of term loan(WCTL) will be repayable in equal monthly/quarterly
instalments within a period of 3-5yr
The term loan for acquiring fixed assets will be repayable in
equal monthly/quarterly instalments within a period of 5 to 7
years including moratorium period of 3-6 months.
Disbursement For term loan for fixed assets and working capital, the loan
amount shall be payable directly to the suppliers of the assets by
draft/cash order.
7/30/2019 1pb11mba31 Afm
8/16
Birla Sun Life Insurance Company
Birla Sun Life Insurance Company also known as BSLI is one of the renowned
names in the field of insurance in India. This insurance company is a result of a
joint venture between Aditya Birla Group, a multinational company in India and
Sun Life Financial Inc, a leading global name in the field of insurance. Birla Sun
Life Insurance has to its credit of being the first company in the field of financial
solution to start the Business Continuity Plan. The vision of the group is to create
long term value together with market leaders.
The primary aim of the company is to help customers ease risks of life, accident,
health and money at every stage and under any circumstance. The company works
towards making the financial future and enterprises of the customers better than
what they currently are. All the works undertaken at Birla is done with integrity,
full commitment, passion and ample speed.
Silent features of BSLI
Birla Sun Life Insurance initiated the Unit Linked Life Insurance Solutions inIndia.
In 4 years, BSLI has made its position very strong as a leading player in theprivate Life Insurance Industry.
The company's focus has been on investment linked insurance products,supported with protection products to uphold leadership in product
modernization
Web-enabled IT systems for superior customer services First to have issued policies over the Internet
7/30/2019 1pb11mba31 Afm
9/16
Corporate governance and a high degree of transparency in all businesspractices and procedures
BSLI Solutions
Birla Sun Life Insurance Company provides individual and other solutions to
customers based on their varied needs. So whether the customer wants long term
protection or short term protection plans, the company has it all for their clients.
The insurance solutions offered by the company are:
Protection Solution Retirement Solutions Children's Future Solutions Health & Wellness Solutions Wealth with Protection Solutions
The protection solutions are ideal for someone who wishes to separate their
insurance and investment needs. The terms of the insurance are made in a way so
that it deals with the most basic need of life insurance, which is the provision of
life cover. The children's future solutions aim to take care of all the financial needs
of the child in the best way possible. The health and wellness solutions have
provisions to take care of any financial emergency that may come up in the
family.
Birla Sun Life Insurance Products
Birla Sun Life Insurance Term Plan is ideal for those who are seeking to get
7/30/2019 1pb11mba31 Afm
10/16
insurance benefits at a lower price. The plan covers all liabilities and provides
complete security to the clients. The minimum age of a customer seeking this
insurance must be 18 years and the maximum age must be 55 years. Premium
payment options range from monthly to annual to quarterly to semi annually
depending on the policies. Listed below is some of Birla Sun Life Insurance saving
policies:
1. Birla Sun Life Insurance Prime Life2. Birla Sun Life Insurance Dream Plan3. Birla Sun Life Insurance Gold-Plus II4. Birla Sun Life Insurance Simply Life5. Birla Sun Life Insurance Flexi Life Line6. Birla Sun Life Insurance Supreme-Life7. Birla Sun Life Insurance Life Companion8. Birla Sun Life Insurance Flexi Save Plus9. Birla Sun Life Insurance Flexi Cash Flow
Balance Sheet of Birla Sun Life
Sources Of FundsMar05
12 mths
Mar '06
12 mths
Mar '07
12 mths
Mar '08
12 mths
Mar '09
12 mths
Total Share Capital 124.40 124.40 124.49 124.49 124.49
Equity Share Capital 124.40 124.40 124.49 124.49 124.49
Share Application
Money0.00 0.09 0.00 0.77 1.68
Preference Share 0.00 0.00 0.00 0.00 0.00
Reserves 942.73 913.78 1,639.29 2,571.73 3,475.93
Revaluation Reserves 0.00 0.00 0.00 0.00 0.00
7/30/2019 1pb11mba31 Afm
11/16
Net worth 1,067.13 1,038.27 1,763.78 2,696.99 3,602.10
Secured Loans 1,253.35 1,221.93 1,151.25 982.66 1,175.80
Unsecured Loans 278.03 229.90 427.38 757.84 965.83
Total Debt 1,531.38 1,451.83 1,578.63 1,740.50 2,141.63
Total Liabilities 2,598.51 2,490.10 3,342.41 4,437.49 5,743.73
Gross Block 4,304.29 4,605.38 4,784.70 4,972.60 7,401.02
Less: Accum.
Depreciation1,755.39 2,068.21 2,267.42 2,472.14 2,765.33
Net Block 2,548.90 2,537.17 2,517.28 2,500.46 4,635.69Capital Work in
Progress48.18 141.03 696.95 2,283.15 677.28
Investments 184.79 172.39 483.45 170.90 1,034.80
Inventories 283.71 379.57 433.58 609.76 691.97
Sundry Debtors 171.95 172.55 183.50 216.61 186.18
Cash and Bank Balance 56.26 61.50 89.59 100.69 104.49
Total Current Assets 511.92 613.62 706.67 927.06 982.64
Loans and Advances 338.86 168.23 265.46 390.43 395.71
Fixed Deposits 0.00 0.10 0.00 0.00 0.00
Total CA, Loans &
Advances850.78 781.95 972.13 1,317.49 1,378.35
Deferred Credit 0.00 0.00 0.00 0.00 0.00
Current Liabilities 1,010.27 1,103.26 1,308.93 1,708.96 1,860.59
Provisions 23.87 39.18 18.47 125.55 121.80
Total CL & Provisions 1,034.14 1,142.44 1,327.40 1,834.51 1,982.39
Net Current Assets -183.36 -360.49 -355.27 -517.02 -604.04
7/30/2019 1pb11mba31 Afm
12/16
Miscellaneous
Expenses0.00 0.00 0.00 0.00 0.00
Total Assets 2,598.51 2,490.10 3,342.41 4,437.49 5,743.73
Contingent Liabilities 130.74 685.42 1,942.56 645.17 355.07
Book Value (Rs) 85.78 83.46 141.69 216.59 289.22
Net Working Capital = Current Assets Current Liabilities
Here,
Current Assets = Inventories + Sundry Debtors + Cash at Bank + Loans &
Advance
Particulars 2005 2006 2007 2008 2009
Inventories 283.71 379.57 433.58 609.76 691.97
Sundry Debtors 171.95 172.55 183.50 216.61 186.18
Cash At Bank 56.26 61.50 89.59 100.69 104.49
Loans And Advances 338.86 168.23 265.46 390.43 395.71
Total Current Assets 850.78 781.95 972.13 1317.49 1378.35
Assuming Loans and advances as Current Assets.
Current Liabilities = C.L + Provisions
7/30/2019 1pb11mba31 Afm
13/16
Particulars 2005 2006 2007 2008 2009
C.L 1010.27 1103.26 1308.93 1708.96 1860.59
Provision 23.87 39.18 18.47 125.55 121.80
Total of Current Liabilities 1034.14 1142.44 1327.40 1834.51 1982.39
Net Working Capital = CA CL
Particulars 2005 2006 2007 2008 2009
Current Assets 850.78 781.95 972.13 1317.49 1378.35
Current
Liabilities1034.14 1142.44 1327.40 1834.51 1982.39
Net Working Capital -183.26 -360.49 -355.27 -517.02 -604.04
Interpretation
When we analyse the Working Capital Management of the company, we can say
that the company is not in the good position because in all of the 5 years the
companys Net Working Capital is negative. The net working capital in the year
2005 was604.04 crore and in the year 2006 it was517.02. Then it slightly
improved to355.27 crore in the year 2007 and it was360. 49 in the year 2008
and finally in the year 2009 it was183.26 crore. Though the companys net
working capital is negative in all the five years, it seems to improving because the
negative balance in the working capital is decreasing. This implies that the
company is improving its net working capital management.
7/30/2019 1pb11mba31 Afm
14/16
This is a good sign for the companys management as they are able to check this
fault and the situation seems to be improving throughout the upcoming period.
Ratio Analysis
Ratios 2005 2006 2007 2008 2009
Current
Ratio
0.82 0.68 0.732 0.718 0.695
Quick
Ratio
0.54 0.35 0.40 0.38 0.34
Absolute
Ratio
0.38 0.20 0.54 0.50 0.44
Working notes:
Current Ratio = Current Assets/Current Liabilities Quick Ratio = Quick Assets/ Current Liabilities
(Quick Ratio = Current AssetsStockPrepaid Expenses)
Absolute Liquid Ratio = Quick AssetsStockBills ReceivablesDebtors
Standard for Ratios:
Current Ratio = 2:1 Quick Ratio = 1:1 Absolute Ratio = 0.5:1
7/30/2019 1pb11mba31 Afm
15/16
Interpretation
When we analyze the ratios of the company then we can find that the company isnot in the good position. The companys overall current ratio is not up to the
standard. The companys current ratio in the year 2005 was 0.82 which is far
below the standard that is 2:1. Again in the year 2006 its current ratio is 0.68,
which too is below the standard and it has also reduced from that which it was in
the year 2005. Further analysing the ratio we can say that the current ratio of the
company is not improving and is reduced to 0.695 in the year 2009.
When we analyse the Quick ratio of the company which should be 1:1, the
company is again not up to the standard. The Quick ratio of the company is 0.54 in
the year 2005, 0.35 in the year 2006, 0.40 in the year 2007 and the same was 0.38
in the year 2008 and finally it was 0.34 in the year 2009. What we can analyse
from this that in non of the five years the companys quick ratio is up to the
standard. In all those five years the company has its quick ratio less than the
required. This implies that the company is not up to the standard.
However when we analyse the absolute ratio of the companys absolute ratio is
near the standard. Since it should be in the ratio of 0.5:1, the company is able to
maintain the standard of its absolute ratio. In all the five years the companys
absolute ratio is near to the standard. Hence we can say that company is able to
maintain its standard in the absolute ratio
Finally when we analyse the overall Net Working Capital Management and Ratio
Analysis of the company then we can say that the company is not in the good
position. The company should pay attention towards the management of its
working capital and besides its liquidity management is also not good.
7/30/2019 1pb11mba31 Afm
16/16
The financial team can also consider long term financing for working capital and
should pay attention towards this problem if the company is to improve its
situation in the coming period of time.
Conclusion
Two very useful business tools to access risk management are the capital
asset pricing model and the discounted cash flow model. The best mix of
debt/equity will provide the investor with the best returns. A clear understanding of
the definition of debt, equity and dividends will definitely be a plus to anyone
wanting to start a business.
Debt instruments such as notes, bonds, certificates, mortgages, leases or
other agreements between a lender and a borrower are used to obtain long term
finance to sustain a business operation. Bond is another alternative to debt
financing. People who purchased bond will be paid a specific interest during the
term that they possessed the bond. Common and preferred stock are equity
financing. Leasing, another form of debt financing, allows the lessee to use the
property without buying it and usually useful for the company that do not have
fund even for the down payment. Long term financing of working capital is also
preferred.
Top Related