sources of finance

Business Finance

The management and raising of funds by commercial organizations needed to launch, run, and expand a business.

Fixed Capital Requirements

The sums of money needed by a business to buy long-term tangible assets like buildings, machinery, and fixtures.

Working Capital Requirements

The money needed to maintain the regular operations of a business, covering current assets and liabilities.

Short Term Funds

Funds used for projects lasting one year or less, such as trade credit and commercial bank loans.

Owners' Funds

Contributions from the founders of an organization, including retained profits, which are not required to be refunded.

Borrowed Funds

Money acquired through loans, such as debentures and bank loans.

Retained Earnings

A portion of net earnings retained in the business for reinvestment rather than distributed to shareholders.

Trade Credit

Credit extended by one trader to another, allowing for delayed payment and effective cash flow management.

Public Deposits

Funds raised directly from the public, offered at higher interest rates than bank deposits.

Equity Shares

Shares that do not carry special rights regarding dividend payments or capital repayment.

Preference Shares

Shares that enjoy preferential rights in terms of dividend payments and capital repayment.

Financial Institutions

Financing provided by institutions suitable for raising large funds for long-term purposes.

Loans from Commercial Banks

Funds provided by banks that accept deposits and give loans with the aim of earning profit.

Capital

The amount of money invested in a business for its operation and growth.

Going-Concern Principle

The assumption that a business will continue its operations indefinitely and make profits.

Business Financing

Continual investment of funds into a business to support its growth.

Merits of Retained Earnings

Permanent source of finance that does not involve explicit costs and allows for more operational freedom.

Demerits of Retained Earnings

Excessive ploughing back can dissatisfy shareholders; profits can fluctuate, creating uncertainty.

Trade Credit

Convenient and continuous credit that helps promote sales with no asset charges.

Trade Credit

Risk of overtrading due to accessible credit and a limitation on available funds.

Public Deposits

Economical, simple process, with no control loss and no charge on assets.

Public Deposits

Not suitable for new companies or long-term financing, and provides limited funds.

Merits of Equity Shares

No obligation for dividends, ideal for adventurous investors, and no charge on assets.

Equity Shares

Risks of fluctuating returns and high cost of capital.

Merits of Preference Shares

Preferential safety of returns, ensured repayment of principal, and no interference in management.

Limitations of Preference Shares

Limited appeal, dilution of equity claims, and low returns.

Financial Institutions

Provides medium and long-term finance, assistance in business, and easy repayment schemes.

Limitations of Financial Institutions

Difficult procedures, restrictive clauses, and potential management interference.

Merits of Commercial Banks

Economical, maintains business secrecy, and flexible with less formalities.

Limitations of Commercial Banks

Provides mainly short-term financing and has difficult procedures.