sources of finance

1. SOURCES OF FINANCE

2. Sources of finance
In our present day economy, finance is defined as the provision of money
at the time when it is required. Every enterprise, whether big, medium or
small, needs finance to carry on its operations and to achieve its targets. In
fact finance is so indispensable today that it is rightly said that it is the life
blood of an enterprise.

3. 1.Setting up a business
2.Need to finance our day-to-day activities
3.Expansion
4.Research into new products
5.Special situations such as a fall in sales.
Why do we need finance?

4. (A) External Sources.
(B) Internal Sources.
The various sources of finance available to business
may be classified as

5. External Sources : External sources are outside of the firm. They are used
extensively for collecting initial capital. The important external sources are -
1) Issue of shares
2) Issue of debentures
3) Public deposits
4) Loan from institutions
5) Bank Credit
Internal Sources : Internal sources are available within the firm. They
develop after few years of profitable working of the firm. The important internal
source of finance is 'retained profit'. It is also called as 'ploughing back of profit'.
Here the undistributed profit of the firm is reinvested in the business.

6. The external source and internal source, may be further classified as
(a) Long term source
(b) Short term source
(a) Long term source : A business firm requires long term finance for meeting
fixed capital needs. These funds are required generally for long duration. The main
sources of long term finance may lie divided into –
(1) Owned Capital
(2) Debt Capital
(b) Short term source : The short term funds are required for meeting
working capital requirement. These funds are required for a short period. Theshort
term funds can be arranged from taking short term loans, accepting deposits, etc.

7. SHARES:
The capital of a company is divided into shares. Each share forms a unit
of ownership of a company and is offered for sale so as to raise capital for
the company. Description: Shares can be broadly divided into two
categories - equity and preference shares.
1.Equity Shares:
Equity shares are also known as 'ordinary shares' For legal
reason, a company can not exist without equity shares.
The above definition reveals the two important features of equity shares –
1. The equity shares do not enjoy preference in getting dividend.
2.The equity shares do not have priority for payment of capital at the time of
winding up of the company.

8. 2. Preference Shares:
As the name indicates, these shares have certain privileges and
preferential rights distinct from those attaching to equity shares.
The shares which carry following preferential rights are termed as
preference shares.
(a)A preferential right as to the payment of dividend during thelife
time of the company.
(b) A preferential right as to the return of capital in the event ofwinding
up of the company.
Holder of these shares have a prior right to receive the fixed rate of
dividend before any dividend is paid to equity shares. The rate of
dividend is prescribed in the issue.

9. (B) RETAINED PROFITS:
Retained profits are earnings of the company which are
retained in the business. It is a sum total of those profits,
accumulated over years and reinvested in the business rather
than distributed as dividend.
"The process of accumulating corporate profits and their
utilization in business is called retained earning".

10. (C) 1. DEBENTURES:
Debentures represent borrowed capital. The debenture holders are
creditors of the company. The debenture holder gets a fixed rate of interest
as return on his investment. Board of Directors has the power to issue
debentures.
2. BONDS:
Bond is a debt security. The company borrows money and issues bonds as
evidence of debt. Bond holder is creditor of the company. The amount of
interest is paid ort bond. It is a fixed charge and must be paid even profit is
not available. All bonds have maturity date and is paid off in cash at certain
date in future. Since they axe creditors and non-owners, they are not
entitled to participate in general meeting.

11. (D) PUBLIC DEPOSITS:
Public deposit is an important source of financing short term requirement of
company. Companies generally receive public deposits for the period ranging
from 6 months to 36 months.
(E) LOAN FROM FINANCIALINSTITUTIONS:
First Industrial Policy was declared in 1948 for rapid industrial development in
the country. The Government of India established special financial institutions for
providing industrial finance. There are 12 financial institutions .at. national level
and 46 at, state level. These institutions provide medium and long term finance.
The assistance of these institutions has become important for new companies as
well as going concerns.

12. The following chart will give brief idea about the network of All IndiaFinancial
Institutions. They are classified into four categories as follows –
 FINANCE INSTITUTIONS:
Development
Banks
Financial
Institutions
Investment
Institutions
State level
Institutions
1. IDBI 1. RCTC 1. LIC 1. SFC
2. IFCI 2. TDICI 2. UTI 2. SIDC
3. ICICI 3. TFCI 3. GIC 4. SIDBI
5. IRBI

13. I. Development Banks
1. Industrial Development Bank of India (IDBI)
2. Industrial Finance Corporation of India Ltd. (IFCI)
3. Industrial Credit and Investment Corporation of India Ltd. (ICICI)
4. Small Industries Development Bank of India (SIDBI)
5. Industrial Reconstruction Bank of India (IRBI)
II. Financial Institutions
1. Risk capital and Technology Finance, Corporation Ltd. (RCTC)
2. Technology Development and Information Company of India Ltd(TDICI)
3. Tourism Finance Corporation of India Ltd. (TFCI)
III. Investment Institutions
1. Life Insurance Corporation of India (LIC)
2. Unit Trust of India (UIT)
3. General Insurance Corporation of India (GIC)
IV. State level institutions
1. State Financial corporations (SFC)
2. State Industrial Development Corporation (SIDC)

14. LOANS FROM COMMERCIALBANKS:
Commercial banks play an important role in providing short term finance. Now banks
have become primary source of financing working capital of business organizations.
In India, primary source of financing working capital are bank credit and trade credit.
TRADE CREDIT:
No business can be run without 'credit'. It is considered as soul of business. Trade credit
financing is common to all businesses. It is a short term financing to business.
Manufactures, wholesalers and suppliers of goods or materials are called `Trade creditors'.
They sell tangible goods to other business concerns on the basis of future payment i.e.
deferred payment. Credit is extended by these business concerns with an intention to
increase their sales. These business firms extent credit, also because of the custom that
has been built up over time. Such credit is not cash-loan. It results from a sale of
goods/services, which have to be paid some time after the sale takes place.
In short, `trade credit' is said to be granted when goods are delivered by supplier to a
customer, in advance of payment.

15. DISCOUNTING OF BILL OF EXCHANGE:
Discounting of bill is relatively of recent origin in India. Reserve Bank of
India has introduced `New Bill Market Scheme' in 1970. According to
this, bank credit is being made available through discounting of bill by
banks. In short, under the scheme, RBI has considered use of bill as an
instrument of credit.