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
- What is finance?
- How business finance helps you to grow your business?
- Chart showing different sources from where you can finance your business
- What are Short-term Sources of finance?
- Medium-term Sources of finance?
- What is Long -term Sources of finance?
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.
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?
- To improve cash flows
- Help in expand through new projects
- To better working capital management
- To improve credit administration
- Help in risk management
- To better Assets management
- To better Evaluation
Let me show you the chart from where you can finance your business
According to Repayment period, Sources of finance can also be classified into—
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
- Trade Credit
- Short-Term Bank Borrowings
- Bills Of Exchange
- Short –Term Loan From Financial Institutions
- Advances From Customers
- Public Deposits
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
- 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.
3) Long-term Sources of finance
Long-term sources are those sources that are required to be Re-paid after 5 years.
Examples of Long-term Sources of finance —
- Equity Share Capital
- Preference Share Capital
- Debentures And Bonds
- Long Term Institutional Loans
- Retention Of Profits
- Long Term Loan From Development Banks And Commercial Banks
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:
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.
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.
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.
A. in short, internal sources of finances include Retained earnings or bootstrapping your profits and provision for Depreciation, etc.
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A commerce student from Kolkata.