Source 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.
• Why do we need finance?
• Setting up the business
• Need to finance our day-to-day activities
• Expansion
• Research into new products
• Special situations such as a fall in sales

3. Types of Sources of finance
• The various sources of finance available to business may be classified
as-
• External Sources
• Internal Sources
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

4. Internal sources of finance
• Internal sources of finance: 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.

5. Types of sources of finance- Duration
• Long-term sources of finance
• 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-
• Owned capital
• Debt capital
• Short-term sources of finance
• The short-term funds are required for meeting working capital
requirement. These funds are required for a short period. The short
term funds can be arranged from taking short-term loans, accepting
deposits among others.

6. A. 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