2. SOURCE OF FUND
• The need for funds
No business can live without funds. Throughout the life of a business, money is
business, money is needed continuously. Firms raise money mainly to meet the
to meet the following three types of need:
1. To start a business as initial expenditure;
2. To fund continuous business activities and money flowing;
3. To expand the business.
3. SOURCE OF FUND
• Sources of funds
• In general, a business may have two major
sources of funds which are needed for its
business operations. They are internal sources
of funds and external sources of funds.
4.
5. SOURCE OF FUND
Internal Sources:
Business generated fund from itself for the
development and expansion. It Can be achieved
through
1. Profit
2. Depreciation
3. Sale of Assets
6. SOURCE OF FUND
➤Internal Sources:
1. Profit
It is an important and inexpensive source of
finance, for example, the retained earnings of
the business. A large part of finance is funded
from profit.
7. SOURCE OF FUND
➤ Internal Sources:
2. Depreciation
financial provision for the replacement of old
machinery and equipment's. Nearly all businesses
use depreciation as a source of funds
8. SOURCE OF FUND
➤Internal Sources:
3. Sale of Assets
When a business can not raise finance from banks
or other sources, it may be forced to sell some
assets, such as company cars, land property,
etc. to solve its urgent financial problems
(this activity is called divestment).
9. SOURCE OF FUND
External Sources:
Business Sources from outside the business are
known as External sources
1. Long Term Sources
2. Short Term Sources
10. SOURCE OF FUND
External Sources:
1. Long Term Sources
A. Share Capital
The most important source of funds for a limited company. It is often considered as permanent capital as it is
not repaid by the business, but the shareholder can have a share in the profit, called dividend.
Three types of shares are:
Ordinary shares: The most common types of shares, and the most riskiest shares. Dividend depends on the profit
of firm. But all ordinary shareholders have voting rights.
Preference shares: The share owners receive a fixed rate of return. They carry less risk than ordinary
shareholders. But they are not strictly owners of the company.
Deferred shares: These shares are often held by the founders of the company. Deferred shareholders only receive
the dividend after the ordinary shareholders have been paid.
11. SOURCE OF FUND
External Sources:
1. Long Term Sources
B. Loan Capital
Any money which is borrowed for a long period of time by a business is called loan
capital.
Three types of shares are:
Debentures: fixed rate of return, first to be paid
Bank loans and mortgages: suitable for small to medium sized firms where property or some
other asset acts as security for the loan
Merchant or Investment Banks: act on behalf of clients to organize and underwrite raising
finance
Government/EU: may offer loans in certain circumstances
Grants.
12. SOURCE OF FUND
External Sources:
2. Short Term Sources
A. Bank loans: This is a loan which requires a rigid agreement
between the borrower and the bank. The amount borrowed must be
repaid over a certain period or in regular installments.
B. Overdraft facilities: This is a short term financing from banks.
The amount to be overdrawn depends on the needs of the business at
the time and its credit standing.
C. Leasing: provides the opportunity to secure the use of capital
without ownership – effectively a hire agreement
