A Key Note on the Sources of Finance
Finance is very important factor to start a business. A business cannot function properly without adequate funds. Sometimes the initial capital which is contributed by the business owner is not enough for the proper functioning of the business, so the entrepreneur find other financial sources to meet the requirements of the business. The financial needs of the business is mainly for fixed capital requirements (land and building, plant and machinery, and furniture and fixtures) andworking capital requirements (salaries, wages, taxes, and rent). A lot of finance sources are available easily to us like retained earnings, debt, term loans, debentures, letter of credit, working capital loans, equity, venture funding etc. All these can be mainly classified on the basis of:
- The Ownership
- The Control & The Source of finance generation
- Time period
Let’s read here more about different types of sources of finance.
- Based on the period of Duration/Time
This type of financial source is mainly classified into three types.
Long-term financial source: These types of funds are usually used to meet the requirements of the business for a period exceeding five years. Example: shares, debentures, loans.
Medium-term financial sources: generally medium-term financial source are used to meet the requirement of enterprise for a period of more than one year but less than 5 year. Example: Borrowing from banks, public deposits.
Short-term financial sources: these types of funds mainly used for a period not exceeding one year. Example: Trade credit, commercial papers and loans from commercial banks.
- Based on Ownership
This is basically divided into two types.
Owner Funds: These are funds, in which the major funds are provided by the owner of the business, who may be a sole trader or partners of the company. This fund is invested for a long duration and it is not to be refunded during a long period of time. Example: Equity shares
Borrowed Funds: These are the funds which are mainly raised through loans and borrowings and are provided for a specific period of time with some repayment terms and conditions. Example: public deposits and trade credit, loans from commercial banks, loans from big/small financial firms/institutions, & issue of debentures.
- Based on the generation of Sources
These are funds, which are generated from within the enterprise or from other external sources. It is also known as the internal and the external financial sources. The internal sources of finance are mainly used to meet the limited needs of the business. The external sources of finance mainly raised from suppliers, lenders and investors. But these funds are large amounts so the risk associated with this fund is more than as compared to internal sources because in some cases the company might give its assets as security to obtaining these large funds.