Class 12 Finance Chapter 17 Venture Capital and Factoring

Class 12 Finance Chapter 17 Venture Capital and Factoring Solutions English Medium As Per AHSEC New Syllabus to each chapter is provided in the list so that you can easily browse through different chapters ASSEB Class 12 Finance Chapter 17 Venture Capital and Factoring Solutions in English and select need one. AHSEC Class 12 Finance Chapter 17 Venture Capital and Factoring Solutions Download PDF. HS 2nd Year Finance Textual Solutions.

Class 12 Finance Chapter 17 Venture Capital and Factoring

Also, you can read the NCERT book online in these sections Solutions by Expert Teachers as per Central Board of Secondary Education (CBSE) Book guidelines. ASSEB Class 12 Banking Question Answer are part of All Subject Solutions. Here we have given HS 2nd Year Finance Textual Solutions English Medium for All Chapters, You can practice these here.

Venture Capital and Factoring

Chapter: 17

Unit – 4: Financial Services

A. Very Short Answer Questions: 

1. Venture capital represents financial investment in a highly risky project.(True/False)

Ans: True

2. Venture capital comes only in the form of equity participation.(True/False)

Ans: False

3. Venture capital is for long-term investment.(True/False)

Ans: True

4. The third party employed by a firm for debt collection is called Factor.(True/False)

Ans: True

5. “Factoring is primarily a contract of debt collection.”(True/False)

Ans: True

6. A financial institution may work as a Factor.(True/False)

Ans: True.

7. There are three parties to a Factoring arrangement.(True/False)

Ans: True.

8. A Factor is paid a fee for undertaking collection of debts.(True/False)

Ans: True.

B. Short Answer Questions: 

1. What is Venture Capital?

Ans: Venture capital is a form of long-term finance provided to new or existing business enterprises with high growth potential but involving high risk.

2. Write two features of Venture Capital Financing.

Ans: Features of Venture Capital Financing:

(i) The venture capital finances basically involve equity participation.

(ii) Venture capital represents financial investment in a risky project with the object of earning high rate of return.

(iii) Venture capital finance is basically long-term investment.

(iv) Venture capitalist prefers a small firm specialized in new idea, technology oriented and having higher potential of returns

(v) Venture capital financing takes place in the form of equity participation and conventional loan.

3. Write two importance of Venture Capital Financing.

Ans: (i) Venture capital can help the entrepreneurs who have no previous entrepreneurial skills.

(ii) It helps in the starting of a new manufacturing unit.

(iii) It also serves as input of the skills needed to set up firms and design marketing strategies.

4. Write two services provided by a Factor to the client.

Ans: (i) Collection of book debts from customers.

(ii) Providing finance against accounts receivable (book debts).

5. What are the different parties involved in Factoring services?

Ans: (i) Client (Seller of goods).

(ii) Debtor (Customer/Buyer).

(iii) Factor (Financial institution or agency).

6. Write any two types of Factoring services.

Ans:(i) Recourse and non-recourse factoring .

(ii) Advance and maturity factoring .

C. Long Answer Questions (Type-I): 

1. Explain in brief three features of Venture Capital funding.

Ans: (i) Basically Equity Financing: Venture capital mainly provides finance through equity participation in the business.

(ii) High Risk: Venture capital is invested in highly risky projects with the objective of earning a high rate of return.

(iii) Long-term Investment: Venture capital is generally a long-term investment, and the investor earns mainly through capital gains.

2. State the importance of Venture Capital funding.

Ans: (i) Assists in launching new ventures.

(ii) Helps in starting manufacturing using new technology.

(iii) Provides counselling and managerial guidance.

(iv) Helps in upgradation of technology.

(v) Assists sick units in revival.

(vi) Develops entrepreneurial skills.

(vii) Helps in the growth and expansion of business.

3. Write the services provided by a Factor to corporate client.

Ans: (i) Collection of account receivables.

(ii) Administration of sales ledger.

(iii) Financing by providing advance against receivables.

(iv) Protection against risks of bad debts.

(v) Helps in maintaining a better credit policy.

(vi) Provides advisory services.

4. Write the benefits of Factoring services for the industries.

Ans: (i) Relieves the client from the burden of debt collection.

(ii) Provides advance payment against invoice value.

(iii) Takes care of sales ledger, credit control and debt administration.

(iv) Enables the client to concentrate on production, marketing and other business activities.

(v) Provides information about customers’ creditworthiness.

5. Define Recourse and Non-recourse Factoring.

Ans: Recourse Factoring: In this arrangement, the factor does not bear the risk of bad debts. If the customer fails to pay, the loss is borne by the corporate client.

Non-recourse Factoring: In this arrangement, the factor bears the risk of bad debts arising from non-payment by the customer. Therefore, the factor charges a higher commission.

6. Explain the steps involved in Factoring process.

Ans: (i) The corporate client enters into an agreement with the factor.

(ii) The corporate client sells goods on credit to customers.

(iii) A copy of the invoice is sent to the factor.

(iv) The factor pays up to 80% of the invoice value as advance.

(v) The factor sends a statement of account to the customer.

(vi) The customer makes payment to the factor.

(vii) The factor deducts his charges and pays the balance to the corporate client.

7. Explain the functions of a Factor.

Ans: The various functions provided by a Factor to corporate clients are as follows:

(i) Collection of Account Receivables: The main function of the factor is to collect receivables on behalf of the corporate client and relieve the client from the burden of debt collection. The factor uses its wider network, manpower, and technology for prompt collection.

(ii) Administration of Sales Ledger: The factor maintains a separate sales ledger for each buyer. It records all credit sales and sends periodic reports to the corporate client regarding the status of receivables and collections.

(iii) Financing: The factor provides advance finance to the corporate client, generally 75% to 80% of the value of receivables. The remaining amount is paid after collecting the full amount from customers, after deducting commission.

(iv) Protection against Risks: The factor fixes a credit limit and undertakes the risk of non-payment by customers up to the agreed limit.

(v) Helps in Maintaining Better Credit Policy: The factor evaluates the financial soundness of customers through bank reports, trade references, and financial statement analysis, helping the client maintain an effective credit policy.

(vi) Advisory Services: The factor provides advisory services such as customer preference analysis, marketing suggestions, and assistance in obtaining bank loans and other financial guidance.

D. Long Answer Questions (Type-II): 

1. What are the various features of venture capital funding? Also state the importance of venture capital funding in the setting up of new ventures.

Ans: Features of Venture Capital Funding:

Basically Equity Financing: Venture capital financing primarily involves equity participation, which means contributing to the required capital of the firm.

Risks: It involves making financial investments in highly risky projects with the objective of earning a high rate of return.

Long-term Investment: Venture capital is basically a long-term investment, where the capitalist earns returns in the form of capital gains.

Nature of Firms Preferred: Venture capitalists generally prefer small firms that specialize in new ideas, are technology-oriented, and demonstrate a higher potential for returns.

Modes of Financing: Funding can take place in the form of equity participation, conventional loans with fixed interest rates, and conditional loans in the form of royalties.

Relationship and Management: The entrepreneur and venture capitalist act as partners. Furthermore, venture capitalists take an active interest in the management of the assisted firms.

Stages of Financing: It involves various stages such as seed capital (for concept testing), start-up finance (to manufacture the product), additional finance (for working capital needs), and establishment finance (for growth and expansion).

Importance of Venture Capital Funding:

Assists in Launching Ventures: It helps entrepreneurs who have no previous entrepreneurial track record to launch their projects.

Helps in Starting Manufacturing: It provides significant impetus to new entrepreneurs to manufacture products using new technologies and commercialize them.

Counselling: Venture capitalists provide the necessary input of skills to set up firms, design marketing strategies, and organize and manage the business.

Help in Upgradation of Technology: It assists smaller units in upgrading their technology to meet the specific demands of major industrial units.

Assists Sick Units: Venture capital has gained importance as a means to solve the sickness of a struggling company.

Help in Developing Entrepreneurial Skill: It helps first-generation entrepreneurs translate their ideas into reality by developing their entrepreneurial skills.

Helps in Growth and Expansion of Business: The financing is involved right from testing innovative business ideas to assisting in the ultimate growth and expansion of the enterprise.

2. What is factoring? Explain different types of factoring services.

Ans: Factoring is a debt collection service provided by financial institutions and market intermediaries. It is a type of finance wherein a business sells its accounts receivable (invoices) to a third party to meet its short-term liquidity needs. The financial institution, known as a ‘Factor’, undertakes the financial burden of collecting these debts from trade customers in exchange for a fee, and often makes advance payments against the credit sales to their corporate clients.

Different Types of Factoring Services:

Recourse and Non-recourse Factoring: In recourse factoring, the factor does not take on the risk of bad debts, meaning any loss from non-collection must be borne by the selling corporate client. In non-recourse factoring, the factor fully bears the risk of bad debts or losses from buyer non-payment and typically charges a higher commission for this service.

Advance and Maturity Factoring: Under an advance factoring arrangement, the factor pays a certain percentage of the total receivables as an upfront advance to the corporate client, and pays the balance after fully collecting from the buying client. In maturity factoring, no advance is paid; instead, payment is made either upon full collection of the receivables or on a guaranteed payment date.

Conventional or Full Factoring: The factor performs almost all services related to the collection of receivables, such as maintaining sales ledgers, credit collection, credit control, and credit insurance.

Domestic and Export Factoring: Domestic factoring occurs when all parties (the buyer firm, corporate seller, and the factor) reside in the same country. Export factoring involves a foreign buyer and includes four parties: the exporter (selling firm), the importer (buyer firm), the export factor, and the import factor.

Seller-based and Buyer-based Factoring: In seller-based factoring, the seller is approved by the factor based on their goodwill and creditworthiness, allowing them to sell all account receivables along with invoices and contracts. In buyer-based factoring, the factor agrees to the proposal based purely on the buyer’s goodwill and creditworthiness rather than the seller’s.

Disclosed and Undisclosed Factoring: In disclosed factoring, the name of the factor is explicitly mentioned on the invoice, instructing the buyer firm to make its payment directly to the factor on the due date. Under undisclosed factoring, the name of the factor is not disclosed on the invoice.