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Sources of Business Finance

Business Finance
It refers to the funds required for the setting up of businesses and carrying out their various operations.
Nature of Business Finance
i. Required to carry out various business operations and activities
ii. Primarily involves the estimation of the amount of funds that are needed by the business
iii. The requirement for business finance differs across business types and across time
iv. Required for maintaining continuity of business operations
Need for Business Finance
The following are the reasons why a business needs funds:
a. A business requires funds for the purchase of fixed assets (fixed capital requirement) such as building, machinery and furniture.
b. Funds are required to finance the day-to-day operations (working capital requirement) such as purchase of raw materials and payment of wages.

Classification of Business Finance
Business finance can be classified on the basis of the following:

On the basis of period
Long-term funds
Medium-term funds
Short-term funds
On the basis of ownership
• Owners’ funds
• Borrowed funds

Owners’ Funds vs Borrowed Funds
Basis of Difference Owners’ Funds Borrowed Funds
Investor Invested by the owners of the company Invested by outsiders
Type Permanent source of capital Not a permanent source of capital
Security No security required Security required
Return No returns are paid. Returns are paid.
Control Grants control over the company Does not grant any control over the company
Risk It is called risk capital of the business as neither the principle nor the returns are guaranteed Carries less risk as both the principle the returns are guaranteed.
On the basis of source of generation:
External sources
Internal sources
Internal Sources vs External Sources:
Basis of Difference Internal Sources External Sources
Meaning Refers to funds generated within the business Refers to the funds generated outside the business
Control Can be controlled by the management Cannot be controlled by the management
Extent of funding Can be used for financing limited needs of a business Can be used for financing large financial requirem…

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