Sources of Business Finance
Unlike Partnership or Sole Proprietorship, a Company has many options from where it can arrange funds to operate a business. In Proprietorship and Partnership concerns, the funds may be raised either from friends and family or as a loan from a bank. But in the Company form of business, funds can be arranged from various sources. Various sources of Finance can be classified into three major categories, which are-
1. On the Basis of Period
- Long-term: The long-term sources fulfil the financial requirement of an enterprise for a period exceeding 5 years. It includes sources such as shares and debentures, long-term borrowing and loans from a financial institution.
- Medium-term: When funds are required for more than 1 year but less than 5 years then the company opt for medium-term finance options. These sources include borrowings from commercial banks, public deposits etc.
- Short-term: Short-term funds are those which are required for a period not exceeding one year. Trade credits, loans from commercial banks and commercial papers are some examples of short-term funds.
2. On the Basis of Ownership
- Owner’s Fund: Those funds which are provided by the owner of the enterprise are called Owner’s Fund. Shares and retained earnings are some examples of the Owner’s Fund.
- Borrowed Fund: Those funds which are borrowed from the outsiders as loans or borrowings are called Borrowed Funds.
3. On the Basis of Source of Generation
- Internal Source: Those funds which are generated from inside the business are called Internal Sources of Fund. Collection of receivables, disposing of surplus inventories are some examples of internal sources.
- External Source: External Sources of funds include those sources that lie outside the organisation such as suppliers, lenders and investors.
Related Articles:
Contact Us