Corporate Funding

Corporate finance is the subfield of finance?that deals with how corporations address funding sources, capital structuring, accounting, and investment decisions.

?Corporate finance is often concerned with maximizing shareholder value through long and short-term financial planning and the implementation of various strategies. Corporate finance activities range from capital investment to tax considerations. This can be of two types viz. banking fund and non-banking fund. Non-banking funds is further sub divided into fund based and non fund based.

Bank funding refers to all the sources of funds that a treasurer can access from a banking institution. This may be by way of loans, working capital funding and fund-based and non-fund based instruments. Banks are essentially those financial intermediaries who accept deposits for the purpose of lending. The second most important function of commercial banks is to lend money to individuals and institutions who need short-term and long term funds.

Debt Funding

Indian Fund Based Funding

Indian Non-Fund Based

Letter of Credit: A letter of credit, or "credit letter," is a letter from a bank guaranteeing that a buyer's payment to a seller will be received on time and for the correct amount. In the event that the buyer is unable to make a payment on the purchase, the bank will be required to cover the full or remaining amount of the purchase. It may be offered as a facility.

Due to the nature of international dealings, including factors such as distance, differing laws in each country, and difficulty in knowing each party personally, the use of letters of credit has become a very important aspect of international trade.

Bank Guarantee: A bank guarantee is a type of financial backstop offered by a lending institution. The bank guarantee means that the lender will ensure that the liabilities of a debtor will be met. In other words, if the debtor fails to settle a debt, the bank?will cover it. A bank guarantee enables the customer, or debtor, to acquire goods, buy equipment or draw down a loan.

Stand by LC: A standby letter of credit?(SLOC) is a legal document that guarantees a bank's commitment of payment to a seller in the event that the buyer–or the bank's client–defaults on the agreement. A standby letter of credit helps facilitate international trade between companies that don't know each other and have different laws and regulations. Although the buyer is certain to receive the goods and the seller certain to receive payment, a SLOC doesn't guarantee the buyer will be happy with the goods. A standby letter of credit can also be abbreviated SBLC.

Equity Funding

Public Funding: Public funding is an investment class and consists of capital that is listed on a public exchange.

Private Funding: Private equity is an alternate investment?class and consists of capital that is not listed on a public exchange. Private equity is composed of funds and investors that directly invest in private companies, or that engage in buyouts?of public companies, resulting in the delisting?of public equity. Institutional and retail investors provide the capital for private equity, and the capital can be utilized?to fund?new technology, make acquisitions, expand working capital, and to bolster and solidify a balance sheet.?

A private equity fund?has Limited Partners?(LP), who typically own 99 percent of shares in a fund and have limited liability, and General Partners?(GP), who own 1 percent of shares and have full liability. The latter are also responsible for executing and operating the investment.

Non-Fund Based Funding

Debentures: A debenture is a type of bond or other debt instrument that is unsecured by collateral. Since debentures have no collateral backing, they must rely on the creditworthiness and reputation of the issuer for support. Both corporations and governments frequently issue debentures to raise capital or funds.

Securitized Debt Instrument Bonds: Securitized debt instruments are financial securities that are created by securitizing individual loans (debt). Securitization is a financial process that involves issuing securities that are backed by a number of assets, most commonly debt. The assets are transformed into securities, and the process is called securitization. The owner of the securities receives an income from the underlying assets; hence, the term asset-backed securities.

Working Capital: Working capital, also known as net working capital (NWC), is the difference between a company’s current assets - such as cash, accounts receivable/customers’ unpaid bills, and inventories of raw materials and finished goods and?its?current liabilities, such as accounts payable and debts.

Bill Discounting: Bill discounting refers to receiving the amount of the bill or the invoice by exchanging the same at a preferred or partner lender of the beneficiary of the invoice but not at the full amount of the invoice. The banks charge a percentage of fees for such benefit which essentially means that the bill is discounted at a particular rate. The banks or lenders earn a percentage of fees for such service provided to the beneficiary and the beneficiary receives the dues of the bill immediately without having to wait till the end of the credit period.

Factoring: A factor is an intermediary agent that provides cash or financing to companies by purchasing their accounts receivables. A factor is essentially a funding source that agrees to pay the company the value of an invoice less a discount for commission and fees. Factoring can help companies improve their short-term cash needs by selling their receivables in return for an injection of cash from the factoring company. The practice is also known as factoring, factoring finance, and accounts receivable financing.

Foreign Funding

ECB: External Commercial Borrowings (ECB) refers to the debt shouldered by an eligible entity in India for solely commercial purposes, that has been extended by external sources, i.e. from any recognized entity outside India.?

ADR: The term American depositary receipt (ADR) refers to a negotiable?certificate issued by a U.S. depositary bank representing a specified number of shares usually one share of a foreign company's stock. The ADR trades on U.S. stock markets?as any domestic shares would. ADRs offer U.S. investors a way to purchase stock in overseas companies that would not otherwise be available. Foreign firms also benefit, as ADRs enable them to attract American investors and capital without the hassle and expense of listing on U.S. stock exchanges.

GDR: A global depositary receipt (GDR) is a bank certificate issued in more than one country for shares?in a foreign company.?GDRs list shares in two or more markets, most frequently the U.S. market and the Euromarkets, with one fungible security.

GDRs are most commonly used when the issuer is raising capital in the local market as well as in the international and US markets, either through private placement or public stock offerings. A global depository receipt?(GDR) is?very similar?to an American Depository Receipt?(ADR), except an ADR only lists shares of a foreign country in the U.S. markets.

FCCB: A foreign currency convertible bond (FCCB) is a type of convertible bond issued in a currency different than the issuer's domestic currency. In other words, the money being raised by the issuing company is in the form of foreign currency. A convertible bond is a mix between a debt and equity instrument. It acts like a bond by making regular coupon and principal payments, but these bonds also give the bondholder the option to convert the bond into stock.

FCEB: Foreign Currency Exchangeable Bond (FCEB) means “a bond expressed in foreign currency, the principal and interest in respect of which is payable in foreign currency, issued by an Issuing Company and subscribed to by a person who is a resident outside India, in foreign currency and exchangeable into equity share of another company, to be called the Offered Company, in any manner, either wholly, or partly or on the basis of any equity related warrants attached to debt instruments. The FCEB may be denominated in any freely convertible foreign currency.

Other Commercial Tools:

Inter-corporate Loans: When a company provides loan, security or guarantee to another company or any entity is termed as inter-corporate loans. And, when a company invests in any other company in any form is referred as inter-corporate investment.

Commercial Paper: Commercial paper is a commonly used type of unsecured, short-term debt instrument issued by corporations, typically used for the financing of payroll, accounts payable and inventories, and meeting other short-term liabilities. Maturities on commercial paper typically last several days, and rarely range longer than 270 days.

Commercial paper is usually issued at a discount?from face value and reflects prevailing market interest rates.

Deposits: A deposit is a financial term that means money held at a bank. A deposit is a transaction involving a transfer of money to another party for safekeeping. However, a deposit can refer to a portion of money used as security or collateral for the delivery of a good.

NCRPS: Non-convertible redeemable preference share means a preference share which is redeemable in accordance with the provisions of the Companies Act, 1956/2013, and does not include a preference share which is convertible into or exchangeable with equity shares of the issuer at a later date, with or without the option of the holder.?

In the upcoming articles of this series, you shall go through in detail about each of the above mentioned funding type.