Any type of business or occupation requires money at every stages of its operation. Whether it is a small business or large, manufacturing or trading or transportation business, money is an essential requirement for every activity. Money required for carrying out business activities is called business finance. Finance is needed to establish a business, to run it, to modernise it, to expand, or diversify it. This chapter deals with various aspects and sources of finance.
Types of Business Finance:
The type and amount of funds required usually differs from one business to another. Hence, there exists multiple classification of business finance based on different selected parameters.
Based on the period for which the funds are required, the business finance is classified into three categories.
- Short-term Finance
- The short-term finance is required for a period of one year or less
- Medium-term Finance
- Investments/Finance are required for more than one year but less than five years.
- Long-term Finance
- The amount of funds required by a business for more than five years is called long-term finance
On the basis of ownership, the sources of business finance can be broadly classified into two categories:
- Owner’s funds
- It consist of equity share capital, preference share capital and reserves and surpluses or retained earnings.
- Borrowed funds
- It can be in the form of loans, debentures, public deposits etc.
Sources of Short-Term Finance
- Trade credit
- Bank credit
- Loans and Advances
- Cash Credit
- Bank Overdraft
- Discounting of Bills
- Instalment Credit
- Loans from Unorganised sectors
Sources of Long-Term Finance
- Issue of Shares
- Retention of Profit
- Issue of Debentures
- Loans from financial institutions
- Public Deposits
- Lease financing
- Foreign Investment