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Sources Of Finance

Objective

To know about Various sources offinance

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Finance Meaning

Finance – Money

Life blood of every activity or business

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For an Individual

Salary Income

Loans from

Friends

Company and

Banks

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Why business need Money?

• To Start up

• To Expand

• To relocate

• To takeover

• To Replace

• To employ more staff

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Factors Affecting Demand for Finance

Objectives

Risks

Colleteral offered

Time Factors

Legal Status of business

Financial Status of the firm

Economic Climate

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Sources

of Finance

Internal

Profit

(RE)

Working

CapitalSale of 

Assets

External

Short

term

Over Draft

Loans

Trade Credit

Factoring

Longterm

Loans

Mortgage

Debentures

Venture

Capital

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Internal Sources of Finance

• Sources

Personal Savings (Sweat Equity)

Profit (retained earnings)

Reduced working Capital

Sale of assets and lease back

Cash at bank

Owners investment Reduce stock levels

Delay payment to creditors

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Term of Finance

Short term finance (up to one year)

Cash at bank

Trade Credit

Delaying payment to creditors

Medium term finance (1 – 3 yers)

Retained earnings

Sale of assets Long term finance

Owner’s investment 

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Long Term Finance

A business requires funds to purchase fixedassets like land and building, plant andmachinery, furniture etc.

The capital required for these assets is calledfixed capital.

Purpose of long term finance:

To Finance fixed assets To finance the permanent part of working

capital

To finance growth and expansion of

business

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 Factors determining long-term

financial requirements

Nature of Business

Nature of goods produced

Technology used

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Sources of long term finance

Shares

Debentures

Public Deposits

Retained earnings

Term loans from banks

Loan from financial institutions

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Retained Earnings

The percentage of net earnings not paidout as dividends, but retained by thecompany to be reinvested in its core business

or to pay debt. It is recorded undershareholders' equity on the balance sheet.

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Merits

Cheap Source of Capital

Financial stability

Benefits to the shareholders

Limitations

Huge Profit

Dissatisfaction among shareholders

Fear of monopoly

Mis-management of funds

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External Sources of Finance

Loans

Over Draft

Loan

Debentures

Share Capital

Factoring Debts

Lease

Hire Purchase

Mortgage

Venture Capital

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Share Capital

Meaning of Share Capital: 

Share capital denotes the amount of capitalraised by the issue of shares, by a company. It

is collected through the issue of shares andremains with the company till its liquidation.

shareholder are the owners of the company

The total share capital is divided into small

parts and each part is called a share. Share is the smallest part of the total capital of

a company

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Types of Shares

Equity shares

Preference Shares

Features:

Preference in dividends.

Preference in assets in the eventof liquidation.

Convertible into common stock. Callable at the option of the corporation.

Nonvoting.

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Types of Preference Shares

Cumulative or Non-cumulative

Redeemable and Non- Redeemable

Participating Preference Share or non-

participating preference shares

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The “Secrets” to Successful Financing 

1. Choosing the right sources of capital is adecision that will influence a company for alifetime.

2. The money is out there; the key is knowingwhere to look.

3. Creativity counts. Entrepreneurs have to beas creative in their searches for capital as theyare in developing their business ideas.

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4. The World Wide Web puts at entrepreneur’sfingertips vast resources of information thatcan lead to financing.

5. Be thoroughly prepared before approachinglenders and investors.

6. Entrepreneurs should not underestimate theimportance of making sure that the

“chemistry” between themselves, their companies, and their funding sources is agood one.