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Meaning:
Finance is the lifeblood of business. It refers to the funds required to carry out various activities in a business, such as purchasing assets, goods, services, or financing day-to-day operations.
Types of Sources:
1. Based on Period:
- Short-term Sources: (Less than 1 year) – e.g., trade credit, bank overdraft.
- Medium-term Sources: (1-5 years) – e.g., loans from commercial banks, lease financing.
- Long-term Sources: (More than 5 years) – e.g., shares, debentures, retained earnings.
2. Based on Ownership:
- Owner’s Funds: e.g., equity shares, retained earnings.
- Borrowed Funds: e.g., loans, debentures, public deposits.
3. Based on Source of Generation:
- Internal Sources: e.g., retained earnings.
- External Sources: e.g., loans, public deposits, issuing shares or debentures.
Major Sources of Business Finance:
- Equity Shares
- Preference Shares
- Debentures
- Public Deposits
- Commercial Banks
- Financial Institutions (e.g., SIDBI, IDBI)
- Lease Financing
- Retained Earnings
- Trade Credit
- Factoring
Important Points:
- Equity capital involves ownership and carries voting rights.
- Debentures are borrowed funds and carry a fixed interest rate.
- Public deposits are unsecured loans taken from the public.
- Retained earnings are profits kept in the business for reinvestment.
- Trade credit is credit extended by suppliers.
- Leasing allows use of an asset without owning it.
