Sources Of Financing

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:

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1. Based on the Period:

Sources of Finance may be classified under various categories based on the period.

Long-term sources:
Finance may be mobilized by long-term or short-term. 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. Share capital, issue of debenture, long-term loans from financial institutions and commercial banks come under this kind of source of finance. 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

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 concern.

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:

An ownership source of finance include

● Shares capital, earnings
● Retained earnings
● Surplus and Profits

Borrowed capital include

● 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.

Internal source of finance includes
● Retained earnings
● Depreciation funds
● Surplus

External sources of finance may be include
● Share capital
● Debenture
● Public deposits
● Loans from Banks and Financial institutions

4. Based in Mode of Finance:

Security finance may be include
● Shares capital
● Debenture

Retained earnings may include
● Retained earnings
● Depreciation funds

Loan finance may include
● Long-term loans from Financial Institutions
● Short-term loans from Commercial banks.

The above classifications are based on the nature and how the finance is mobilized from various sources. But the above sources of finance can be divided into three major classifications:

● Security Finance
● Internal Finance
● Loans Finance

Sourced From: Financial Management By C. Paramasivan And T. Subramanian