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 Sources of Finance
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Introduction Finance is the lifeblood of business. No business can be

carried out without Finance. There are several sources of Finance which
can be categorized as Internal or External, Long Term or Short Term and
Fixed and Working Capital Finance.

There is a capital market. A capital market is a market for creating and

exchanging financial assets such as shares, debentures, treasury bills,
commercial paper, etc. It serves as a critical link between savings and
investment by bringing together providers and users of funds.

Capital market is an organised and regulated place where fund providers

want to invest their funds and fund user looking for fund for their capital
needs.
A wide variety of instruments like equity shares, preference shares,
bond, debentures etc are used to raise funds in the capital market.
 Sources of Finance:

Business Finance

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There are two type of financing. Long term and short term.
Long term Business Financing - Meaning & Purpose Long term financing
is a form of financing that is provided for a period of more than a year.
Long term financing is also known as Fixed Capital Finance. Purpose for
which long term finance is availed are finance fixed assets •Expansion of
companies •Increasing facilities •Construction of projects on a large
scale •Acquisition of companies

Short term Business Finance - Meaning & Purpose Short Term Business
Finance are required to meet its day to day expenses. It enables
continuous availability of liquid cash to meet day to day expenses. It is
also known as Working Capital Finance. The purpose of short term
business finance is as below: Purchase of raw material Paying wages to
workers Payment of water and electricity charges etc.
Sources of finance:
 Long Term Financing Short Term financing

Equity shares
Commercial Bank
loan
Preference shares

Retained Public deposits

earning

Depreciation fund
Commerial
papers
Debentures

Bonds
Trade credits
GDRs
Inter corporate
ADRs deposits

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There are two type of funds. Owned fund and borrowed fund.
Owned funds:
Equity shares - Such a shareholder has to share the profits and also bear
the losses incurred by the company. Equity shareholders are regarded as
the real owners of the company. There is no fixed dividend for equity
shareholders.
Preference shares - A share which entitles the holder to a fixed dividend,
whose payment takes priority over that of Equity share dividends.
Financing Retained Earnings: The company may not distribute the
whole of its profits among its shareholders. It may retain a part of the
profits and utilize it as capital for further long term activities.
Depreciation Fund: A fund set up by a company to provide money to
buy new fixed assets. Every year, the fund invests an amount of money
equal to an existing asset's depreciation allowance, giving the company
money that can be used to buy new assets.
Global Depository Receipts (GDRs): A GDR is an instrument which a
company issues in US dollar in order to collect foreign capital. It is traded
on all those American and European stock exchanges where it is listed.
One GDR can represent more than one equity share. The holder of GDRs
can get them converted into shares. The holder of GDRs has no voting
rights in the company.

American Depository Receipts (ADRs): An American Depository Receipt

(ADR) is an American dollar-denominated instrument representing
equity ownership in any non-American company. It represents the
shares of any non-US company held on deposit by a custodian bank
outside USA. Any American bank functioning as a depository can issue
ADR which represents a specific number of shares of the issuing
company outside USA. An ADR can be listed on New York Stock
Exchange or on NASDAQ, both of which are share markets in USA. These
are issued only to American investors. A single ADR can represent more
than one share. Holders of ADR has no voting rights and he can get it
converted into shares.

Borrowed Funds: There is a borrowed fund which is required to be

repaid and it bears regular interest as per the terms of the agreement. It
can be secured and unsecured as well.
 Owned fund Borrowed Fund

Equity shares Commercial Bank loan

Public deposits
Preference shares

Commerial papers
Retained
earning
Trade credits

Depreciation fund Inter corporate

deposits

GDRs Debentures

ADRs Bonds
Debentures/Bonds: A debenture/Bonds is a type of debt instrument
issued by a company that can be secured or unsecured by physical assets
or collateral. debenture holders are the creditors of a company and are
repaid the specified sum with interest.
Public Deposit: Public deposits refer to the unsecured deposits invited
by companies from the public mainly to finance working capital needs. A
company can invite public deposits for a period of six months to three
years. Public deposits of a company cannot exceed 25 per cent of its
share capital and free reserves. It bears a fixed rate of interest. It is
repaid on maturity.
Loans from Financial Institutions: Financial Institutions also provides
loan. It is generally secured loan for long term. They provide finance
which is outside the purview of the traditional commercial banks.

Inter Corporate deposit (ICD) is a deposit made by one company with

another company for a short term say upto six months. The ICD is
generally unsecured debt and is arranged by a broker. It is a popular
source of short term finance as it is convenient and free from legal
 formalities. The interest payable depends on the amount and period of
deposit. 6

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Bank Finance Commercial banks: Commercial Banks grant short-term

finance to business firms which is known as bank credit.
Cash Credit - It is an arrangement whereby banks allow the borrower to
withdraw money upto a specified limit.
Bank overdraft - When a bank allows its depositors or account holders
to withdraw money in excess of the balance in his account upto a
specified limit, it is known as overdraft facility.
Bills Discounting - Banks also advance money by discounting bills of
exchange, promissory notes and hundies. When these documents are
presented before the bank for discounting, banks credit the amount to
customer's account after deducting discount.
Short term Bank Loan - When a certain amount is advanced by a bank
repayable after a specified 9 period, it is known as bank loan. The period
is usually short like 1 - 3 years.

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Other Sources:
Trade credit - Trade credit refers to credit granted to manufacturers and
traders by the suppliers of raw material, finished goods, components,
etc Customers' advances - Customers' advance represents a part of the
payment towards price on the product (s) which will be delivered at a
later date. Customers generally agree to make advances when such
goods are not easily available in the market or there is an urgent need of
goods.
Instalment credit - Only a small amount of money is paid at the time of
delivery of such articles. The balance is paid in a number of instalments.
Interest is charged by the supplier for extending credit.

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Modern sources of Finance: Modern days the ways have changed as to
how Startups and established business are sourcing funds for business.
Below are the unconventional sources of Finance:
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Angel Investment: An angel investor is an experienced industry person

who provides needed funds for small startups or entrepreneurs. Apart
from funds, Angels invest their time, experience, network and energy in
business they invest in.

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Venture Capital (VC): Venture capital (VC) is money provided to seed

early-stage, emerging growth companies. Venture capital funds invest in
companies in exchange for equity in the companies they invest in, which
usually have a novel technology or business model in high technology
industries, such as biotechnology and IT. Foodpanda is funded by a
Venture Capital Firm, Rocket Internet.

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Private Equity (PE): Private equity consists of investors and funds that
make investments directly into private companies or conduct buyouts of
public companies that result in a delisting of public equity. Capital for
private equity is raised from retail and institutional investors, and can be
used to fund new technologies Justdial, the local search engine was
funded by Private Equity Investors like Sequoia Capital and SAP
Ventures.
By: Aashi Darda, Class 10 C, Roll No. 1
Subject: Commercial Studies
By: Aashi Darda
Class: 10 C
Roll No.: 1
Subject: History