2. Introduction
Finance is the lifeblood of business.
No business can be carried out without Finance.
There are several sources of Finance which can be categorized as Internal
or External, Long Term or Short Term and Fixed and Working Capital
Finance
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3. Sources of Finance
Traditional Sources of
Finance
Internal
Financing
Retained
Earnings
Debentures
Long Term
Short Term
Preference
Shares
Equity Shares
Security
Financing
Loan
Financing
Depreciation
Fund
Public Deposits
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4. Long term Financing - Meaning & Purpose
Long term financing is a form of financing that is provided for a period of more
than a year. Long term financing is also known as Fixed Capital Finance. Below
are the purpose for which long term finance is availed:
➔To finance fixed assets
➔Expansion of companies
➔Increasing facilities
➔Construction of projects on a large scale
➔Acquisition of companies
➔Merging different companies with the existing entities
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5. Sources of Long Term Finance - Security
Financing
● Shares: These are issued to the general public. These may be of two types:
Equity shares - Such a shareholder has to share the profits and also bear the losses incurred by the
company. Equity shareholders are regarded as the real owners of the company.
Preference shares - A share which entitles the holder to a fixed dividend, whose payment takes
priority over that of ordinary share dividends.
● Debentures: A debenture is a type of debt instrument issued by a company that is not
secured by physical assets or collateral.
● Public Deposit: It implies any money received by a company through the deposits or loans
collected from the public.
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6. Sources of Long Term Finance - Internal
Financing
Retained Earnings: The company may not distribute the whole of its profits
among its shareholders. It may retain a part of the profits and utilize it as capital
for further long term activities.
Depreciation Fund: A fund set up by a company to provide money to buy new
fixed assets. Every year, the fund invests an amount of money equal to an existing
asset's depreciation allowance, giving the company money that can be used to buy
new assets.
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7. Sources of Long Term Finance - Loan
Financing
Term Loans from Banks: Many industrial development banks, cooperative banks
and commercial banks grant medium term loans for a period of 3-5 years for
supporting the long term capital investments by the company viz., purchase of
Fixed Assets, expansion etc
Loan from Financial Institutions: There are many specialized financial
institutions established by the Central and State governments which give long
term loans at reasonable rates of interest for the long term capital investments by
the company.
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8. Short term Business Finance - Meaning &
Purpose
Short Term Business Finance are required to meet its day to day expenses. It
enables continuous availability of liquid cash to meet day to day expenses. It is
also known as Working Capital Finance. The purpose of short term business
finance is as below:
● Purchase of raw material
● Paying wages to workers
● Payment of water and electricity charges
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9. Sources of Short Term Finance - Bank Finance
Commercial banks grant short-term finance to business firms which is known as bank credit.
Cash Credit - It is an arrangement whereby banks allow the borrower to withdraw money upto a
specified limit.
Bank overdraft - When a bank allows its depositors or account holders to withdraw money in
excess of the balance in his account upto a specified limit, it is known as overdraft facility.
Bills Discounting - Banks also advance money by discounting bills of exchange, promissory notes
and hundies. When these documents are presented before the bank for discounting, banks
credit the amount to customer’s account after deducting discount.
Short term Bank Loan - When a certain amount is advanced by a bank repayable after a specified
period, it is known as bank loan. The period is usually short like 1 - 3 years.
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10. Short Term Finance - Other Sources
Trade credit - Trade credit refers to credit granted to manufacturers and traders
by the suppliers of raw material, finished goods, components, etc
Customers’ advances - Customers’ advance represents a part of the payment
towards price on the product (s) which will be delivered at a later date. Customers
generally agree to make advances when such goods are not easily available in the
market or there is an urgent need of goods.
Instalment credit - Only a small amount of money is paid at the time of delivery of
such articles. The balance is paid in a number of instalments. Interest is charged
by the supplier for extending credit.
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11. Reshuffling the earlier chart
Traditional Sources of Finance
Internal
Financing
Retained
Earnings
Debentures Bills
discounting
Cash credit
Preference Shares
Equity Shares
Security
Financing
Short term
Bank Loan
Depreciation
Fund
Public Deposits
Short Term
Source of Finance
Long Term Source of
Finance
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Loans from
Banks
Loans from
Financial
Institutions Bank Overdraft
Other
Sources
From Banks
Installment
credit
Customer
Advances
Trade credit
12. Modern sources of Finance
Modern days the ways have changed as to how Startups and established business
are sourcing funds for business. Below are the unconventional sources of Finance:
● Angel Investment
● Venture Capital (VC)
● Private Equity (PE)
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13. Angel Investment
An angel investor is an experienced industry person who provides needed funds
for small startups or entrepreneurs. Apart from funds, Angels invest their time,
experience, network and energy in business they invest in.
Sanjay Mehta, an Angel Investor has invested in several startups viz., OYO Rooms,
FabAlley, OrangeScape etc.
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14. Venture Capital (VC)
Venture capital (VC) is money provided to seed early-stage, emerging growth
companies. Venture capital funds invest in companies in exchange for equity in
the companies they invest in, which usually have a novel technology or business
model in high technology industries, such as biotechnology and IT.
Foodpanda is funded by a Venture Capital Firm, Rocket Internet.
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15. Private Equity (PE)
Private equity consists of investors and funds that make investments directly into
private companies or conduct buyouts of public companies that result in a
delisting of public equity. Capital for private equity is raised from retail and
institutional investors, and can be used to fund new technologies
Justdial, the local search engine was funded by Private Equity Investors like
Sequoia Capital and SAP Ventures.
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