Sources of Business Finance
SOURCES OF BUSINESS FINANCE
❖ Business Finance
➢ Meaning
It refers to the funds required for the setting up of businesses and carrying out their various operations.
➢ Nature of Business Finance
i. Required to carry out various business operations and activities
ii. Primarily involves the estimation of the amount of funds that are needed by the business
iii. The requirement for business finance differs across business types and across time
iv. Required for maintaining continuity of business operations
ii. Primarily involves the estimation of the amount of funds that are needed by the business
iii. The requirement for business finance differs across business types and across time
iv. Required for maintaining continuity of business operations
➢ Need for Business Finance
The following are the reasons why a business needs funds:
a. A business requires funds for the purchase of fixed assets (fixed capital requirement) such as building, machinery and furniture.
b. Funds are required to finance the day-to-day operations (working capital requirement) such as purchase of raw materials and payment of wages.
a. A business requires funds for the purchase of fixed assets (fixed capital requirement) such as building, machinery and furniture.
b. Funds are required to finance the day-to-day operations (working capital requirement) such as purchase of raw materials and payment of wages.
❖ Classification of Business Finance
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Business finance can be classified on the basis of the following:
➢ On the basis of period
➢ On the basis of period
• Long-term funds
• Medium-term funds
• Short-term funds
• Medium-term funds
• Short-term funds
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➢ On the basis of ownership
• Owners’ funds
• Borrowed funds
• Borrowed funds
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Owners’ Funds vs Borrowed Funds
| Basis of Difference | Owners’ Funds | Borrowed Funds |
| Investor | Invested by the owners of the company | Invested by outsiders |
| Type | Permanent source of capital | Not a permanent source of capital |
| Security | No security required | Security required |
| Return | No returns are paid. | Returns are paid. |
| Control | Grants control over the company | Does not grant any control over the company |
| Risk | It is called risk capital of the business as neither the principle nor the returns are guaranteed | Carries less risk as both the principle the returns are guaranteed. |
➢ On the basis of source of generation:
• External sources
• Internal sources
• Internal sources
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Internal Sources vs External Sources:
| Basis of Difference | Internal Sources | External Sources |
| Meaning | Refers to funds generated within the business | Refers to the funds generated outside the business |
| Control | Can be controlled by the management | Cannot be controlled by the management |
| Extent of funding | Can be used for financing limited needs of a business | Can be used for financing large financial requirem… |
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