## Procurement of Funds
### Key Considerations When Raising Finance
Every source of funds differs on three dimensions:
| Dimension | Meaning |
|---|---|
| Cost | How much does it cost to use this source? |
| Risk | What is the chance of financial failure? |
| Control | Does using this source dilute ownership/control? |
Financial managers must balance these three to keep funding cost low while managing risk and control.
> Too much debt → High risk (mandatory repayment and interest)
> Too much equity → High cost + possible loss of control
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### Sources of Funds
#### 1. Equity
- Best from the firm's risk perspective — no repayment obligation
- Expensive because:
- Shareholders expect high dividends
- Dividends are paid from after-tax profits (not tax-deductible)
- May dilute control of existing owners
#### 2. Debentures (Debt)
- Cheaper than equity because interest is tax-deductible (tax shield)
- Higher risk — interest must be paid whether or not the firm is profitable; principal must be repaid on schedule
#### 3. Bank Funding
Commercial banks support businesses through:
- Daily operations (deposits, payment services)
- Short-term loans (working capital)
- Long-term loans (machinery, buildings)
#### 4. International Funding
| Instrument | Nature |
|---|---|
| FDI (Foreign Direct Investment) | Directly buying shares of a company |
| FII (Foreign Institutional Investors) | Buying through capital markets |
| ADRs / GDRs | Special international share issues listed abroad |
Funding mechanisms must be adapted to the requirements of foreign investors.
#### 5. Angel Financing
- A form of equity financing provided by a wealthy individual ("angel investor")
- Investor receives ownership/equity in exchange for capital
- Typically invests 25–60% to help a company get started
- Suited for start-ups that:
- Do not qualify for bank funding
- Are too small for venture capital financing
- Example: Sun Microsystems, Google received angel funding in early stages
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### Need for Innovation in Fund Raising
In a globally competitive environment, traditional funding sources are not enough. Businesses must explore creative financial products that meet investor needs.
> Example: Trading in Carbon Credits has emerged as an alternative funding source — firms earn credits for reducing emissions and sell them to raise capital.