Sources of Finance

As we know, cash is the most important factor to every company to exist and develop. Without cash, the business would not be able to survive. Cash is required for all activity of a company, such as buying new premises, investing on a plan, developing a product, buying new machines, equipments, etc… So every company always look for different sources of finance that can help them maintain and develop the businesses. There are various sources of finance that the companies need to consider in particular cases. Each source has it own advantage and disadvantage and different source will be more advantage in different case.

Sources of finance are divided into 2 main kinds depend on the length of the sources and the amount of money: Long term and short term sources

I. Long term sources of finance:

1. Share

Share is a part ownership of a public limited company (PLC). When the company need cash it can issue shares and sell to public. People who buy shares are the shareholder of the company. There are 2 kind of share: ordinary share and reference share.

a. Ordinary share: the nominal value of the ordinary shares is the issue value of the share. They don’t have fix interest rate. Their value is determined in the stock market

+Advantage:

-It is a cheap and fast way to raise the big amount of money.

-Spread the risk of the company to the other people (shareholders).

+Disadvantage:

-The ordinary shareholders have the right to vote in general meeting of the company -( share control of the company

-The company might issue new shares to the shareholders of another company, in order to take it over.

-Dividend payments are not tax deductible for the company.

b. Preference shares: similar to bond. The dividend rate of the preference share usually low but fix and the company have to pay their dividend before paying dividend of common shares.

+Advantage

-The preference shareholders do not have the right to vote in general