Home Finance SOURCES OF FINANCE - What are the different sources to raise finance?

SOURCES OF FINANCE – What are the different sources to raise finance?

       I will explain to you all the sources of finance, you can pick any one of them and use them in your business.

    When I started my business, I realized finance is too important at the initial stage. It also helps me to run my business operations smoothly. Availability of finance enable me to Expand, Develop product line, and acquire new project in my business.

Therefore, I share you the learning regarding finance what I got in my business.

what’s in it for me

  1. What is finance?
  2. How business finance helps you to grow your business?
  3. Chart showing different sources from where you can finance your business
  4. What are Short-term Sources of finance?
  5. Medium-term Sources of finance?
  6. What is Long -term Sources of finance?
  7. Conclusion
  8. FAQ

What is finance?

Finance /Capital refers to money or wealth which is used at the beginning of a business. We can call it the life-blood of business.

In other words, capital is defined as the money value of net assets employed in a business. moreover, the balance remaining after deduction of outsiders’ claim from total assets of the business is called it’s capital.

That is to say, Liquid cash has been defined as capital in a light sense. But if it is kept idle and not used in the earning process, it should not be treated as capital.  It can be taken as a part of capital if it is employed like other assets for earning income.

image showing various sources of finance

In the case of a joint-stock company, capital is defined as the total shareholders’ claim which can be arrived at by adding the total paid-up share capital with the undistributed profit and deducting therefrom the amount of accumulated loss, if any. consequently, It is the amount that the firm is liable to pay to the owners.

So, in a broad sense, assets, or stock of assets employed for earning income is treated as business capital/ finance.

      In any business, the capital requirement is huge and thus, it is not possible for the owner to finance the whole requirement of capital alone. Therefore, we seek other sources of finance.

How business finance helps you to grow your business?

  1. To improve cash flows
  2. Help in expand through new projects
  3. To better working capital management
  4. To improve credit administration
  5. Help in risk management
  6. To better Assets management
  7. To better Evaluation

Let me show you the chart from where you can finance your business

various sources of finance

According to Repayment period, Sources of finance can also be classified into—

1)  Short-term Sources of finance

it is the Source of finance that is required to be repaid within a period of one accounting year. It is also used for financing working capital. So, short term sources are mainly used for financing the current assets. Likewise, medium and long term sources are used for financing fixed assets.

Short-term Sources of finance are generally used by Sole-Proprietorship, partnership and small businessman, etc.

    Let me give you some examples of Short-term Sources of finance –

  • Cash Credit
  • Bank Overdraft
  • Factoring
  • Trade Credit
  • Short-Term Bank Borrowings
  • Bills Of Exchange
  • Short –Term Loan From Financial Institutions
  • Advances From Customers
  • Public Deposits
money image

2)  Medium-term Sources of finance

Medium-term Sources are those sources that are required to be liquidated / Re-paid not before 1 year but within 5 years. It is often used by Limited Liability Partnership (LLP), One- Person Company (OPC) And Micro, Small and Medium Enterprise (MSME), etc.

Examples of Medium-term Sources of finance

  • Lease Financing
  • Public Deposit For More Than One Accounting Year
  • Hire-Purchase
  • Development Banks Are Also The Source Of Middle-Term Finance
  • similarly, Loan From National Financial Institution/Banks For More Than One Accounting Year And Less Than 5 Years.
SOURCES OF FINANCE

3)  Long-term Sources of finance

Long-term sources are those sources that are required to be Re-paid after 5 years.

Equity and other types of share capital except Redeemable Preference Share Capital can only be Re-paid only in the event of winding up or liquidation of the company.

Examples of Long-term Sources of finance

long term source of finance

Conclusion

to sum up, If you have a small business and you want to finance working capital or current assets then choose short term sources of finance.

on the other hand, if your business operations are big enough and you want to finance fixed assets then you can choose long term sources of finance.

So, guys, I hope I solved your problems (with images) regarding various sources of finance.

Also read my further blogs related to finance:

PUBLIC DEPOSIT

VENTURE CAPITAL FUND

EQUITY SHARES

DEBENTURE

SOURCE OF FINANCE FROM PREFERENCE SHARES

TERM LOAN

BANK FINANCING

FAQ

Q. Which is the sources of finance to start a start up?

A. if you believe in your idea, then you can choose Venture capital, Crowd Funding, or business angels as a source of finance initially, later use bootstrapping for your business growth.

Q. What are the main sources of finance for a company?

A. There are 2 main sources of finance,
Firstly, Internal sources like proposed dividend, Retained profit etc.
secondly, External sources like Owned capital, Borrowed/Debt capital etc.

Q. what is the cheapest source of finance?

A. Debentures are the cheapest source of finance because the interest rate on debentures is fixed. Whatever may be the profit of your business you have to pay fixed interest.

 Q. what are the internal sources of finance for a business?

 A. in short, internal sources of finances include Retained earnings or bootstrapping your profits and provision for Depreciation, etc.

Blogger | content writer | Learner.
A commerce student from Kolkata.

BIKASH SHAW
Blogger | content writer | Learner. A commerce student from Kolkata.
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