Get AHSEC Class 12 Finance Chapter: 17 VENTURE CAPITAL AND FACTORING Important Questions Answers 2025.
In this Post we have provided HS 2nd Year Finance Chapter: 17 VENTURE CAPITAL AND FACTORING Important Notes with Marked/highlighted previous year questions asked in AHSEC Examination.
AHSEC Class 12 Finance Notes
Chapter: 17 VENTURE CAPITAL AND FACTORING
VENTURE CAPITAL AND FACTORING
1. What do you mean by venture capital? What are its characteristics?
Ans: Venture capital is the capital provided by firms of professionals who invest alongside management in young, rapidly growing or changing companies that have the potential for high growth. Venture capital is a form of equity financing especially designed for funding high risk and high reward projects.
According to L.M. Pandey, ‘Venture capital is significant innovation of the twentieth century. It is generally considered as a synonym of high rich capital.
According to Journal of Central Bank, U.K., ‘Venture capital is an equity by which an investor supports an entrepreneurial talent with finance and business skills to exploit market opportunities and thus obtain long term market gains.”
Characteristics of Venture Capital
1. Equity Financing: Venture capital primarily involves providing funds to a business in exchange for a share of ownership (equity) in the company.
2. Dealing with Risk: Venture capital entails investing in projects that carry a high level of risk, aiming for substantial returns despite the uncertainties involved.
3. Long-Term Investment: Venture capital is committed over the long term, with investors looking to make profits through increased company value over time.
4. Preferred Business Traits: Venture capitalists favor small businesses that are innovative, technology- driven and have the potential for significant growth.
5. Method of Finance: Venture capital funding can be in the form of equity (ownership stake), traditional loans (with fixed interest), or contingent loans (with repayment linked to company performance).
6. Collaborative Relationship: Entrepreneurs and venture capitalists typically collaborate as partners, working together to achieve mutual success.
7. Participation in Management: Venture capitalists actively engage in the management of the supported companies, offering guidance and expertise.
8. Stages of Financing: Venture capital funding occurs across various stages:
i. Seed Capital: Initial funds for testing a concept.
ii. Start-up Finance: Capital to produce the product.
iii. Additional Finance: Funding for ongoing operations.
iv. Establishment Finance: Investment for growth and expansion.
2. Explain the importance of Venture Capital Funding. [AHSEC 2024]
Ans: Importance of Venture Capital
a. Assisting New Ventures: Venture capital financing is crucial in helping individuals who are new to starting businesses, especially those who lack prior experience in entrepreneurship.
b. Promoting Manufacturing Initiatives: Venture capital plays a vital role in encouraging entrepreneurs to establish manufacturing ventures that use advanced technologies and introduce innovative products to the market.
c. Providing Expert Guidance: Venture capitalists offer valuable advice and expertise to entrepreneurs, guiding them in setting up their businesses, devising effective marketing strategies and managing operations efficiently.
d. Enhancing Technological Capabilities: Venture capital also supports smaller businesses in upgrading their technology, enabling them to meet the requirements of larger industrial counterparts.
e. Rescuing Sick Units: Venture capital has a significant impact in revitalizing struggling companies, helping them overcome financial challenges and regain stability.
f. Developing Entrepreneurial Skills: Venture capitalists contribute to the development of entrepreneurial skills among first-time business owners, helping them transform their creative concepts into practical business ventures.
g. Enabling Growth and Expansion: Venture capital financing covers a wide spectrum, ranging from testing innovative business concepts to providing continuous support for business growth and expansion.
3. Write the meaning of Factoring Services. Discuss the functions of Factoring Services. [AHSEC 2024]
Ans: Factoring is a type of financial help offered by banks and other financial companies. It’s like a service that helps businesses when they’ve sold things to other companies but haven’t been paid yet. When big companies sell their stuff to other businesses and let them pay later, it can be hard to get that money on time. So, they ask a special kind of money company, called a “Factor,” to collect the money for them. This helps the big companies get the money they’re owed without waiting too long. The Factor takes a small fee from the big company for doing this. The money company can also give some of the money upfront even before the other company pays. In this arrangement, there are three important groups: the Factor company, the big company that needs the money and the other companies that are buying stuff.
Functions Provided by Factor to Corporate Clients
(1) Collection of Account Receivables: The primary role of the factor involves the efficient collection of receivables on behalf of corporate clients. This service relieves clients from the challenges and complexities associated with the collection process. Leveraging their extensive reach, workforce and technological capabilities, factors ensure the prompt retrieval of receivables.
(2) Administration of Sales Ledger: Factors maintain a comprehensive sales ledger for each buyer. Whenever a sale is executed, a copy of the invoice is sent to the factor. The factor maintains separate sales ledgers for individual buyers and regularly provides corporate clients with reports detailing the status of receivables and payments received from buyers.
(3) Financing Assistance: Factors provide advances to corporate clients based on their account receivables. These advances typically amount to 75% to 80% of the consigned goods’ value. The remaining balance is disbursed after the full receivables value is collected, with the deduction of commissions.
(4) Risk Protection: A crucial function of factors is to establish credit limits. They commit to purchasing debts within these limits, thereby shouldering the risk arising from potential non-payment by customers.
(5) Facilitating Improved Credit Policies: Factors contribute to assessing the financial stability of customers. This evaluation involves analyzing bank reports, trade references, financial statements and more. The insights gained help corporate clients make informed decisions about their credit policies. (6) Advisory Services: In addition to their financial services, factors offer advisory support to corporate clients. This can encompass understanding customer preferences for products, suggesting adjustments to marketing policies and aiding clients in obtaining loans from financial institutions.
4. What are the different types/ sub divisions of factor services?
Ans: There are different types of factoring services:
A. Recourse and Non-Recourse Factoring
a. Recourse Factoring: The selling firm retains the risk of bad debts. If receivables aren’t fully collected, the corporate client covers the loss.
b. Non-Recourse Factoring: The factor assumes the risk of bad debts. The factor absorbs lasses if buyers fail to pay, resulting in higher commission charges.
B. Advance and Maturity Factoring
a. Advance Factoring: The factor offers an upfront payment, a portion of the receivables, to the corporate client. The remainder is paid after full collection from buyers.
b. Maturity Factoring: No upfront payment is provided. The factor pays either upon complete receivable collection or upon a guaranteed payment date.
C. Domestic and Export Factoring
a. Domestic Factoring: All involved parties (buyer firm, selling firm and factor) are located in the same country. b. Export Factoring: Parties include the exporter, importer, export factor and import factor, spanning across international borders.
D. Seller Based and Buyer Based Factoring
a. Seller Based Factoring: The seller transfers all receivables to the factor, based on the seller’s goodwill and creditworthiness. b. Buyer Based Factoring: Factoring is approved based on the buyer’s reputation and creditworthiness,
regardless of the seller’s attributes.
E. Disclosed and Undisclosed Factoring
a. Disclosed Factoring: The factor’s name is indicated on the invoice, instructing buyers to make payments directly to the factor. b. Undisclosed Factoring: The factor’s identity remains confidential, not being disclosed on the invoice.
F. Conventional or Full Factoring: The factor handles comprehensive receivables services, including maintaining sales ledgers, credit collection, control and insurance.
5. Discuss the phases/Steps involved in Factoring Services?
Ans: Phases/Step involved in Factoring Services:
Step 1: Agreement Initiation- The process begins as the manufacturing company (corporate client) establishes a formal agreement with a factor, assigning the task of debt collection to the factor.
Step 2: Credit Sales to Trade Customers-Subsequently, the corporate client proceeds with selling its goods on credit to its trade customers, generating a stream of accounts receivable.
Step 3: Invoice Submission- The corporate client promptly shares copies of the generated invoices with the factor. These documents are crucial for maintaining accurate records of the outstanding receivables.
Step 4: Advance Payment- Upon receiving the invoices, the factor takes action by providing an advance payment to the corporate client. This upfront payment often accounts for up to 80% of the total value of the assigned invoices.
Step 5: Trade Customer Notification- The factor informs the trade customers about the assignment of the invoices. This communication includes the details of the account and the change in payment instructions.
Step 6: Payment Remittance by Trade Customer- As the due date arrives, the trade customer remits the payment directly to the factor’s account, aligning with the new payment instructions provided.
Step 7: Final Settlement- Upon receiving payment from the trade customer, the factor reconciles the transaction. They subtract the advanced payment (80% of the invoice value) and the factoring fee. The balance is then given to the corporate client, concluding the transaction cycle.
6. What are the benefits/uses of factoring services?
Ans: Benefits of Factoring Services
a. Easing Debt Collection: Factoring services help companies by taking away the task of collecting money from their customers. This means companies don’t have to worry about getting the money they’re owed.
b. Getting Money Sooner: With factoring, companies can receive some of the money from their sales early, even before their customers pay the full amount.
c. Less Hassle: The factoring company takes care of tasks like keeping track of sales records, making sure customers pay on time and managing debts. This means the company doesn’t have to deal with these things anymore.
d. More Focus on Business: Companies can stop worrying about collecting money and focus on other important things like making products, managing their supplies and marketing.
e. Useful Information: The factoring company shares helpful information with the business about how their customers are doing financially. This helps the business plan for the future better.
7. Very Short Answer Questions
i. Venture capital represents financial investment in a highly risky project. (True)
ii.Venture capital comes only in the form of equity participation. (False)
iii.Venture capital is for long-term investment. (True)
iv. The third party employed by a firm for debt collection is called Factor. (True)
V. Factoring is primarily a contract for debt collection. (True)
vi. A financial institution may work as a Factor. (True)
vil. There are three parties to a Factoring arrangement. (True)
vili. A Factor is paid a fee for undertaking the collection of debts. (True)
8. Who are the three parties to a Factoring arrangement?
Ans: The three parties in a Factoring arrangement are:
(a) The Factor: The financial company that provides Factoring services.
(b) The Corporate Client: The business that sells goods or services and wants to get paid for its invoices. (c) Trade Customers: The customers of the corporate client who owe money for the products or services they bought.
9. What are the stages of financing in factor Services?
Ans: Stages of Financing: Venture capital funding occurs across various stages:
(a) Seed Capital: Initial funds for testing a concept.
(b) Start-up Finance: Capital to produce the product.
(c) Additional Finance: Funding for ongoing operations.
(d) Establishment Finance: Investment for growth and expansion.
-0000000-
