Sources of Finance

Finance is the life blood of a business. The business cannot run efficiently if it's doesn't have adequate finance to meet its req. The financial requirement of business can be classified into two categories.

(i) Short term financial requirements.

(ii) Long term financial requirements.

Short term funds are required for meeting working capital needs. They are usually required for a period upto 1 year. They are raised from sources which can provide only for a short period quickly and at reasonable cost. The requirement of these funds is usually met by taking short term loans or getting the bills discounted from the commercial banks.

      The long term funds are required to a great extent for meeting the fixed capital requirements of the bu. They are required for a period exceeding 1 year. They are sometimes classified as:

(i) Intermediate or medium term funds.

(ii) Long term funds.

  The former category includes funds required for a period of exceeding 5 years. These funds are raised by business from sources which provides in an uninterrupted way, the use of funds for a long period viz, shares, debentures, loans from specialised FUs, etc. Recently the commercial banks have also entered into this area and they have also started providing medium term as well as long term funds to trade and industry, either in dependently or sometimes in collaboration with one or more specialised FIs such as Industrial. Finance corporation of India, industrial credit and investment corporation of India, etc.

Classification of sources of Finance:

The sources from which a business need it's financial requirements can be classified as follows:

A) According to period.

(i) Long term sources, viz, shares, debentures, Long term loans etc 

(ii) Short term sources,viz,advances from commercial banks, public deposits, advances from customers and trade creditors etc.

B) According to ownership

(i) Owned capital, viz, share capital, retained earnings and surplus.

(ii) Borrowed capital,viz,such as debentures, public deposits and loans,etc.

C) According to sources of Generation 

( i) Internal sources,viz, retained earnings, depreciation,funds,etc.

(ii) External sources,viz, securities such as shares, debentures, loans, etc.

However, for the sake of convenience the different sources of funds can be classified into 3 categories.

(i) Security financing: This includes financing through shares (Including both equity and preference shares) and debentures.

(ii) Internal financing: This includes financing through depreciation fund and retained earning.

(iii) Loan financing: This includes both short term and long term loans.