Finance is called the life blood of any business. The requirement of funds by any form of business to carry out its various activities is called Business Finance. The financial needs of a business can be categorized into Fixed Capital Requirement i.e. the funds that are required to purchase and maintain fixed assets such as machinery, building, plant and fixtures. On the other hand, the fund that is used for meeting its day to day operations are called Working Capital Requirements.

CLASSIFICATION OF SOURCES OF FUNDS

In case of sole proprietorship and partnership concerns, the funds may be raised either from personal sources or from borrowings from friends, relatives, banks etc. In case of a company form of organization, the different sources of business finance which are available may be categorized as below:

Retained earnings: The portion of the net earnings of the company that is not distributed as dividends is known as retained earnings. The amount of retained earnings available depends on the dividend policy of the company

 

Trade credit: The credit extended by one trader to another for purchasing goods or services is known as trade credit. Trade credit facilitates the purchase of supplies on credit.

 

Factoring: Factoring has emerged as a popular source of short-term funds in recent years. It is a financial service whereby the factor is responsible for all credit control and debt collection from the buyer and provides protection against any bad-debt losses to the firm.

 

 Lease financing: A lease is a contractual agreement whereby the owner of an asset (lessor) grants the right to use the asset to the other party (lessee). The lessor charges a periodic payment for renting of an asset for some specified period called lease rent.

 

Public deposits: A company can raise funds by inviting the public to deposit their savings with their company.

 

Commercial paper (CP): It is an unsecured promissory note issued by a firm to raise funds for a short period the maturity period of commercial paper usually ranges from 90 days to 364 days.

 

 Issue of equity and preference shares:

 

Equity shares represent the ownership capital of a company. Due to their fluctuating earnings, equity shareholders are called risk bearers of the company. These shareholders enjoy higher returns during prosperity and have a say in the management of a company, through exercising their voting rights.

 

Issue of preference shares: These shares provide a preferential right to the shareholders with respect to payment of earnings and the repayment of capital. Investors who prefer steady income without undertaking higher risks prefer these shares. A company can issue different types of preference shares.