Financial Management: Sources of Finance.

Definition of sources of finance.

Pwede lagyan ng intro diko alam sasabihin ko. haha

Finance

SOURCES OF FINANCE

Sources of finance mean the ways for mobilizing various terms of finance to the industrial

concern. Sources of finance state that, how the companies are mobilizing finance for their

requirements. The companies belong to the existing or the new which need sum amount of

finance to meet the long-term and short-term requirements such as purchasing of fixed assets,

construction of office building, purchase of raw materials and day-to-day expenses. Sources

of finance may be classified under various categories according to the following important

heads:

On the basis of a time period, sources are classified as long-term, and

short term. Ownership and control classify sources of finance into
owned and borrowed capital. Internal sources and external sources are
the two sources of generation of capital. All the sources have different
characteristics to suit different types of requirements.
1. (On the basis of period, the different sources of finance can be categorized into three parts.
These are long-term sources, medium-term sources, and short-term sources.)

When the finance mobilized with large amount and the repayable over the period will be more than five
years, it may be considered as long-term sources The long-term sources fulfil 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 and commercial banks. Long-term source of
finance needs to meet the capital expenditure of the firms such as purchase of fixed assets, land, and
buildings, etc. Long-term sources of finance include:

● Equity Shares

● Preference Shares

● Debenture

● Long-term Loans

● Fixed Deposits

Medium Term Sources of Finance

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, and it is used generally for two reasons. One, when
long-term capital is not available for the time being and second when
deferred revenue expenditures like advertisements are made which
are to be written off over a period of 3 to 5 years. Medium term
financing sources can in the form of one of them:

 Preference Capital or Preference Shares

 Debenture / Bonds
 Medium Term Loans from
 Financial Institutes
 Government, and
 Commercial Banks
 Lease Finance
 Hire Purchase Finance

Short-term sources: Apart from the long-term source of finance, firms can generate finance

with the help of short-term sources like loans and advances from commercial banks,

moneylenders, etc. Short-term source of finance needs to meet the operational expenditure of

the business concerns. Short-term funds are those which are required for a period not exceeding one
year. Trade credit, loans from commercial banks and commercial papers are some of the examples of
the sources that provide funds for short duration. Short-term source of finance include:

● Bank Credit

● Customer Advances

● Trade Credit

● Factoring

● Public Deposits

● Money Market Instruments

2. Based on Ownership Sources of Finance may be classified under various

categories based on the period: On the basis of ownership Sources of Finance, can be classified into
‘owned Capital’ and ‘borrowed Capital’ (Owned capital also refers to equity. It is
sourced from promoters of the company or from the general public by
issuing new equity shares. Promoters start the business by bringing in
the required money for a startup.
An ownership source of finance includes

● Shares capital, earnings

● Retained earnings

● Surplus and Profits

Borrowed capital include (Borrowed or debt capital is the finance arranged

from outside sources. These sources of debt financing include the
following:) ‘Borrowed capital’ on the other hand, refer to the funds raised through loans or
borrowings. The sources for raising borrowed funds include loans from commercial banks, loans from
financial institutions, issue of debentures, public deposits, bonds, and trade credit.

● Debenture

● Bonds

● Public deposits

● Loans from Bank and Financial Institutions.

3. Based on Sources of Generation Sources of Finance may be classified into various

categories based on the period. Another basis of categorising the sources of funds can be whether the
funds are generated from within the organisation or from external sources (internal and
external sources of finance :)
(The internal source of capital is the one which is generated internally
by the business.) Internal source includes
● Retained earnings

● Depreciation funds

● Surplus

(The internal source of funds has the same characteristics of owned

capital. The best part of the internal sourcing of capital is that the
business grows by itself and does not depend on outside parties.
Disadvantages of both equity and debt are not present in this form of
financing. Neither ownership dilutes nor fixed obligation/bankruptcy
risk arises.)
External sources of finance may be include (An external source of finance is the
capital generated from outside the business. External sources of finance may be
include

● Share capital

● Debenture

● Public deposits

● Loans from Banks and Financial institutions.

Palagyan din ng ending na ssabihin hahaha

http://accioneduca.org/admin/archivos/clases/material/sources-of-financing_1563992424.pdf

https://efinancemanagement.com/sources-of-finance#:~:text=Sources%20of%20finance%20for
%20business,and%20their%20source%20of%20generation.

https://www.toppr.com/guides/business-studies/sources-of-business-finance/classification-of-sources-
of-funds/#:~:text=Ownership%20Basis%20Sources,or%20shareholders%20of%20a%20business.

http://www.surendranathcollege.org/new/upload/PRABIR_KUMAR_BHADURISources%20of%20Finance
%20and%20Cost%20of%20Capital2020-05-24Financial%20Management.pdf