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SHORT TERM
LONG TERM MEDIUM TERM SOURCES OF
SOURCES OF SOURCES OF FINANCE /
FINANCE / FUNDS FINANCE / FUNDS FUNDS
Share Capital or Preference Capital or
Equity Shares Preference Shares Trade Credit
Preference Capital or
Preference Shares Debenture / Bonds Factoring Services
Retained Earnings or Bill Discounting
Internal Accruals Lease Finance etc.
Debenture / Bonds Hire Purchase Advances received
Finance from customers
Medium Term Loans
Term Loans from from Financial Short Term Loans
Financial Institutes, Institutes, like Working
Government, and Government, and Capital Loans from
Commercial Banks Commercial Banks Commercial Banks
Long-term financing means capital requirements for a period of more than 5 years to 10,
15, 20 years or maybe more depending on other factors. Capital expenditures in fixed
assets like plant and machinery, land and building etc of a business are funded using
long-term sources of finance.
Owned Capital
Owned capital also refers to equity capital. It is sourced from promoters of the company
or from the general public by issuing new equity shares. Promoters start the business
by bringing in the required capital for a startup. Following are the sources of Owned
Capital:
Equity Capital
Preference Capital
Retained Earnings
Convertible Debentures
Venture Fund or Private Equity
Borrowed capital
Borrowed or debt capital is the capital arranged from outside sources. These sources of
debt financing include the following:
Financial institutions,
Commercial banks or
The general public in case of debentures
Based on the source of generation, the following are the internal and external sources
of finance:
Internal Sources
The internal source of capital is the capital which is generated internally by the
business. These are as follows:
Retained profits
Reduction or controlling of working capital
Sale of assets etc.
The internal source of funds has the same characteristics of owned capital. The best
part of the internal sourcing of capital is that the business grows by itself and does not
depend on outside parties. Disadvantages of both equity capital and debt capital are not
present in this form of financing. Neither ownership dilutes nor fixed
obligation/bankruptcy risk arises.
External Sources
An external source of finance is the capital generated from outside the business.
Apart from the internal sources of funds, all the sources are external sources of
capital.
Deciding the right source of funds is a crucial business decision taken by top-
level finance managers.
The wrong source of capital increases the cost of funds which in turn would have
a direct impact on the feasibility of project under concern.
Improper match of the type of capital with business requirements may go against
the smooth functioning of the business.
For instance, if fixed assets, which derive benefits after 2 years, are financed
through short-term finances will create cash flow mismatch after one year and
the manager will again have to look for finances and pay the fee for raising
capital again.
CAPITAL
Capital is a term for financial assets, such as funds held in deposit accounts, as
well as for tangible factors of production, i.e. manufacturing equipment.
Additionally, capital includes facilities, including buildings used to produce and
store manufactured goods.
TYPES OF CAPITAL
WORKING CAPITAL
The capital of a business which is used in its day-by-day trading
operations, calculated as the current assets minus the current liabilities.
WC= CA-CL
2. Production policy
3. Credit policy
4. Inventory policy
5. Abnormal factor
6. Market conditions
7. Conditions of supply
8. Business cycle
9. Taxation policy