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SANAM SHARMA
FINANCIAL MANAGEMENT
SOURCES OF FINANCE
Classification of the sources of finance
The funds for the business can be raised by various ways. Some of the sources of finance are:
Classification
of sources of
finance
Internal External
Retained Depreciation Long Term Medium Term Short Term
Earnings Fund Sources Sources Sources
Sale of Reduction in Equity Medium term loans Cash Credit
Assets working Preference Deferred Credit Overdraft
capital Debentures/ Public fixed deposits Short term loans
Bonds Leasing Bill Discounting
Long term loans Hire purchase Commercial Paper
Seed Capital Trade Credit
Retained Profits Factoring
Venture Capital Business finance
companies
Indigenous Bankers
Advances from
Distinction between Long term, Medium term & Short term sources of finance customers
Particulars Short Term Finance Medium Term Finance Long Term Finance
Period of finance Minimum requirement of Finance is required for a Finance is required for a
required one day to a maximum of period ranging between period ranging between
one year one to five years five to twenty five years
Sources of Trade credit, factoring, Fixed deposits, bank Reserves, issue of equity
finance forfeiting advances from loans, leasing and hire shares, preference
customers, overdrafts purchase shares, bonds,
debentures, term loans
Uses of funds Financing seasonal Financing purchase of Financing long term
fluctuations and working stock and debtors of the assets
capital company
Volume of funds Volume of funds is small Volume of funds is Volume of funds is high
higher than short term
funds
Security Security through debtors Security in the form of Security in the form of
and stocks and reputation property and other property and high value
of the company in the assets assets
market
Analysis of factors for sourcing funds
Funds for financing company’s requirements should be analyzed before the company looks for
sources of funds. Factors to be considered while taking funds for a company’s requirements are the
following:
1. Risk 3. Cost of financing
2. Return on funds 4. Degree of control
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Sources and uses of Long term, Medium term & Short term sources of finance
Types of Capital Sources Uses
Long Term Share Capital Broaden borrowing base
Retained Earnings Financing major fixed assets
Redeemable Preference Shares Financing takeover or merger
Long Term Loans
Medium Term Hire Purchase Financing Fixed Assets
Leasing Financing Working Capital
Cash
Credit Bill
Discounting
Short Term Cash Credit Financing Seasonal Fluctuations
Bill Discounting Financing Working Capital
Export Credit
Internal Financing
Internal source of finance is referred to the money which is raised from inside the business. It
includes:
1. Retained Earnings: Retained earnings are that part of the profit which is earned every year
but not distributed to the shareholders. It is also known as reserves or ploughed back profits.
In the long run such amount can be used for funding the business.
2. Sale of Assets: It means selling of business assets to generate funds for the business which
have either become old or have become obsolete (not in use for operational purposes).
3. Reduction in Working Capital: It means reducing the level of inventory so that some
additional cash can be raised for business.
4. Depreciation Funds: Depreciation is there in the balance sheet through assets. It does not
generate funds but saves funds. It reduces the taxable income of the business.
External Financing
It is referred to the money which is raised from outside the business. Security financing is a way of
getting external source of financing for the company. The important securities that help in raising
funds for a company are the following:
1. Equity Shares
2. Preference Shares
3. Debentures/Bonds
4. Loan Financing
5. Project Financing
6. Loan Syndication
7. New financial institutions and instruments
8. Book building
9. Depository
10. Factoring
11. Venture Capital
12. Credit Rating
13. Commercial Paper
14. Certificate of Deposit
15. International depository receipts
