SOURCES OF FINANCE

Finance is the lifeblood of business concern, because it is interlinked with all activities
performed by the business concern. In a human body, if blood circulation is not proper,
body function will stop. Similarly, if the finance not being properly arranged, the business
system will stop. Arrangement of the required finance to each department of business
concern is highly a complex one and it needs careful decision. Quantum of finance may be
depending upon the nature and situation of the business concern. But, the requirement of
the finance may be broadly classified into two parts:

Long-term Financial Requirements or Fixed Capital Requirement
Financial requirement of the business differs from firm to firm and the nature of the
requirements on the basis of terms or period of financial requirement, it may be long term
and short-term financial requirements.
Long-term financial requirement means the finance needed to acquire land and building
for business concern, purchase of plant and machinery and other fixed expenditure. Longterm financial requirement is also called as fixed capital requirements. Fixed capital is the
capital, which is used to purchase the fixed assets of the firms such as land and building,
furniture and fittings, plant and machinery, etc. Hence, it is also called a capital expenditure.
Short-term Financial Requirements or Working Capital Requirement
Apart from the capital expenditure of the firms, the firms should need certain expenditure
like procurement of raw materials, payment of wages, day-to-day expenditures, etc. This
kind of expenditure is to meet with the help of short-term financial requirements which
will meet the operational expenditure of the firms. Short-term financial requirements are
popularly known as working capital.

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:

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