Sources of Business Finance
Q-1. Discuss about different Sources of Business Finance.
Different Sources of Business Finance
Business is concerned with the production and distribution of goods and services for the satisfaction of needs of society. For carrying out various activities, business requires money. Finance, therefore, is called the life blood of any business. A business cannot function unless adequate funds are made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the business. A business person, therefore, has to look for different other sources from where the need for funds can be met. A business can raise funds from various sources. Each of the sources has unique characteristics, which must be properly understood so that the best available source of raising funds can be identified. Depending on the situation, purpose, cost and associated risk, a choice may be made about the source to be used.
However, sources of funds are described below –
A. Period Basis
On the basis of period, the different sources of funds can be categorized into three parts. These are long-term sources, medium-term sources and short-term sources.
1. Long-term sources
The long-term sources fulfill the financial requirements of an enterprise for a period exceeding 5 years and include sources such as shares and debentures, long-term borrowings and loans from financial institutions. Such financing is generally required for the acquisition of fixed assets such as equipment, plant, etc.
2. Medium-term sources
Where the funds are required for a period of more than one year but less than five years, medium-term sources of finance are used. These sources include borrowings from commercial banks, public deposits, lease financing and loans from financial institutions.
3. Short-term sources
Short-term funds are those which are required for a period not exceeding one year. Trade credit, loans from commercial
Different Sources of Business Finance
Business is concerned with the production and distribution of goods and services for the satisfaction of needs of society. For carrying out various activities, business requires money. Finance, therefore, is called the life blood of any business. A business cannot function unless adequate funds are made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the business. A business person, therefore, has to look for different other sources from where the need for funds can be met. A business can raise funds from various sources. Each of the sources has unique characteristics, which must be properly understood so that the best available source of raising funds can be identified. Depending on the situation, purpose, cost and associated risk, a choice may be made about the source to be used.
However, sources of funds are described below –
A. Period Basis
On the basis of period, the different sources of funds can be categorized into three parts. These are long-term sources, medium-term sources and short-term sources.
1. Long-term sources
The long-term sources fulfill the financial requirements of an enterprise for a period exceeding 5 years and include sources such as shares and debentures, long-term borrowings and loans from financial institutions. Such financing is generally required for the acquisition of fixed assets such as equipment, plant, etc.
2. Medium-term sources
Where the funds are required for a period of more than one year but less than five years, medium-term sources of finance are used. These sources include borrowings from commercial banks, public deposits, lease financing and loans from financial institutions.
3. Short-term sources
Short-term funds are those which are required for a period not exceeding one year. Trade credit, loans from commercial