Thursday, 3 February 2022

What are different Sources of business finance?

 There is need for adequate capital and financing source in order to start any business. The primary capital amount is foremost crucial right from the start of the business to the further operation of the business.

The capital amount in business is required in several operational activities including the production, processing, purchasing the raw material, transportation, selling the final products, promotion, marketing, and many more.

Businesses requires fund for all of their operational activities whether it is running or operating the business, purchasing the raw material, processing the raw material to the final product, transporting the product to the final customers, promoting the product, or paying the loan or the debt amount, and many more.

It is not feasible to operate any business without adequate amount of fund. Fund management is essential in order to prevent losses in the business. The business owner should be having the skill to cut down the expenses, manage the funds, and thus earn profit.

What more important is to be aware of the sources from where it is possible to generate the fund. It is not possible for all the small start up businesses to have the adequate capital amount. The business man needs to generate the funding source and get the capital amount for leveraging their business idea.   Here in this guide, we are presenting you the best sources for the capital that will help the business owners to shape their business idea in a physical form.

Classification of sources of fund

The sources of capital funding are less for small proprietary and partnership type businesses. For the proprietary and partnership type business, personal funding or loaning are the primary sources for raising capital fund. The proprietary owner or the business partners can combindly raise money either from their personal source, or by borrowing money from bank or others.

But the company type corporate businesses are having several sources from where they can raise the capital fund for their business. The sources of fund for large company style businesses are categorized as follows:

Period basis

Based on period, there are three different categories of capital sources:

  1. Long-term loans
  2. Medium-term loans
  3. Short term loans

Long –term: loan term loans refer to those that lends money for the time period of more than five years. This type of sources is for long term financial requirement of business. They are mainly used by the entrepreneurs for acquiring fixed assets for business. Long term funding sources include borrowings for long term, shares and debentures and taking loans from financial institutions.

Medium-term loans:  requiring period of medium term loans is exceeding one year but not more than five year. These types of sources are mainly utilized by medium sized firms either for launching their venture or for expanding their firms. The pay back in this type of loan is required to be made in two to five year period.

Short term loan: As mentioned in name, this source lends funds for smaller period of time which is less than 1 year. The most common reason of taking short term is maintaining the current assets including inventories, bill receivable, cash and many more.

Ownership basis

The business always requires to invest some of their capital amount in order to start their firm. Though the business owner can ask for sponsorship or take loan, but some of the capital amount need to be invest from their side. The capital amount from the business owner side is termed owner capital amount.  

The owner’s funds are further categorized in two major sources. One Source of owner fund includes the issuing equity shares from the owner side and the second one of the owner fund includes the profit earned reinvested for the advancement of the firm.

Another source of capital fund involves loans from commercial banks or other borrowings. The borrowings include issue debentures, public deposit and trade credits. Payment of these types of loans is needs to be done before expiry time. Also, there is need for paying fixed rates of interest on such borrowings.

These kind of interest based loans put a lot of burden on business as the owner need to compulsorily pay the interest amount regardless of the profit or loss in the business.

Generation based capital fund

The major source of capital fund for business includes either fund raising from the internal or the external part of the business.

Internal sources

The fund raised by reinvesting the profit earned is termed as capital fund from the internal source of the business.  In this kind of capital amounts, a certain portion of net earnings of the organization is utilized for maintaining business growth and expansion of business.  Issue equity shares in company are considered as fund from the internal source as well.

External sources

The external sources of capital fund include the trade credits, lease financing, public deposits, debentures, bank borrowing, and many more. 

  • Trade credits: Trade credit refers to purchase of raw material on credit basis. In simple words, we can say trade credit is something where the company purchases the raw material but the payment is made after the profit earned. Many of the raw material companies are having the feature of offering the raw material on credit basis. It is basically a short term loans under liabilities. Trade credits depend on the volume of purchase made by business.
  • Lease financing: lease financing is contract based agreement between two parties. In this financing, the owner of asset allows the lessee to rent their asset and make profit out of it. The lessee pays a fixed amount on fixed time as rent.
  • Public deposits: the large business and company raises fund directly from the public and offer them high interest as compared to bank.
  • Debentures: debentures are important sources of raising fund for company.  Organization need to pay fixed rate of interest. Organization gives assurance to debentures holders for repaying their amount at a fixed future date.
  • Bank borrowings:  banks occupy an important role for funding business. Banks provides different type of loans including long term loans, short term loans. Overdraft and many more.

Bottom   

So these are the most popular and convenient source of funding for different business types. I hope this guide help the entrepreneurs in raising fund for their venture.

  

  

 

No comments:

Post a Comment

Six most important functions of the entrepreneur concerning economic development

  The entrepreneur is the most important person who organizes the production process in the business. Other than this function, all other re...