EXPLAIN SOURCES OF BUSINESS FINANCE IN DETAILS:-
Business finance may be defined as, planning, raising, managing and controlling all the money used or capital funds of any kind used in connection with business.
Finance is a major function of any business enterprise. It deals with the arrangement of an adequate amount of capital to achieve the objectives of the enterprise.
SOURCES OF BUSINESS FINANCE:-
There are two sources of business finance:
1- Owner's Fund: It refers to the fund contributed by owners as well as the accumulated profit of the company.
(a) Equity Share: The equity shares are those shares which do not carry any special or preferential rights in the payment of annual dividend or repayment of capital. These share holders are the owner of the company.
(b) Preference Shares: Preference Shares are those shares which get preference over equity shares in respect to:
i– The payment of dividend.
ii- The repayment of investment amount during winding up.
(c) Retained Earnings: Retained Earnings/profits are also known as ploughing back of profit, retained profits, self–financing, reserves or surplus.
It refers to undistributed profits after payment of dividend and taxes.
2- Borrowed Fund: It includes all fund available by way of loans or credit.
(a) Debentures/Bonds: A Debenture is a document or a certificate issued by a company under its seal as an acknowledgement of its debt. Holder of debenture certificate is called debentureholder.
(b) Public Deposits: A company wishing to invite public deposit, places an advertisement in newspapers. It is unsecured deposits because no security is required for it.
(c) Commercial Bank: Commercial Bank provides loan, advances, bank overdraft, cash credit and discounting the bill facilities to public as well as industries.
(d) Loan from Financial Institutions: Public Financial Institutions are referred to as lending institutions, development banks or financial institutions. They provide long term financial assistance to industries and business enterprise.
(e) Trade Credit: It refers to an arrangement whereby a manufacturer is granted a credit from the supplier for raw materials, inputs, spare parts etc..
FACTORS KEPT IN MIND BEFORE SELECTING A SUITABLE SOURCE OF BUSINESS FINANCE:-
1- Cost Involved: Before finalizing any source of finance, the company must find out the cost involved in procurement of funds and cost involved in using the funds.
2- Financial Capacity Of The Firm: If the firm is financially sound then it may prefer borrowed funds but if the firm is not financially stable then it must depend upon the owner's fund securities.
3- Form of Business Organisation: Sole proprietorship firm and partnership firm cannot raise fund by issue of shares or debentures whereas joint stock enterprises prefer issue shares and debentures to raise fund.
4- Time Period: The firm requires fund as for a short period trade credit are suitable whereas for a long–term shares, debentures are suitable, for a medium–term public deposits, loans are suitable.
5- Tax Benefits: If a firm wants to get tax benefit it should issue debentures, preference shares, loans, public deposits etc..
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