Finance is the most significant part of any Business as Entrepreneurs need the funds for essential functions like the purchase of raw material, machinery, and other expenses. Businesses need to meet these expenses from time to time and hence will require Finances throughout the year.
Therefore, determining the sources from where a Business can acquire funds is essential so that they carry out different commercial operations seamlessly.
Introduction of Business Finance
Business is concerned with the production and distribution of goods and services for the satisfaction of the needs of society. For carrying out various activities, Business requires money. Finance, therefore, is called the lifeblood of any Business. The requirements of funds by a Business to carry out its various activities are called Business Finance. A Business cannot function without adequate funds being made available to it. The initial capital contributed by the entrepreneur is not always sufficient to take care of all financial requirements of the Business. Therefore a Businessman has to look for different other sources from where the need for funds can be met.
Sources of Business Finance
The various sources of Business Finance are as follows:
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External Funding: Through Debt: Entrepreneurs can trust on borrowing funds from reputed loan agencies. Such an agency provides loans on the existing Business that has achieved a certain level in terms of annual turnover and who has a stable income.
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Through Equity: Entrepreneurs can share their Business ideas to the investors and request funds for their Business. In case if their ideas get approval from the investors then investors might give them the capital which they will need in the exchange for a share in the Business.
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Internal Funds: These funds are generated by the owner of the enterprise in the form of preference share, equity share, etc. It helps the owner to gain their control over the company in the form of shares and therefore can take major decisions related to the company. It also helps them to avoid taking debt but this kind of funds is only possible if the owner has sufficient funds to avoid approaching lenders or investors.
Categories of Sources of Business Finance
The major categories of Sources of Business Finance are listed below. An entrepreneur can have a look at these categories and can decide which suits best for their Business.
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Equity Finance: In this type of Finance investors are the owners of the company to the extent of their investment. An investor contributes a huge amount of money to the Business in the exchange of the shares in the Business. When the Business starts generating profit investors earn benefits depending upon the number of shares they own.
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Debt Finance: As the same describes it is the money that is borrowed from lenders and has to repay at a predetermined rate of interest over time.
What is Business Finance?
Business Finance refers to the money or fund needed to perform various Organizational Operations like the purchase of raw material, goods, assets, etc.
Tangible assets like machinery, buildings, furniture, factories, as well as intangible assets like trademarks, patents, technical expertise, etc. are part of essential Business operations. Business Finance refers to the money which is required for the purchase and maintenance of these assets along with other overhead expenses.
Understanding Sources of Business Finance
Now, to accumulate these Finances, Businesses rely on multiple sources so that they have ample amounts of funds throughout. To start a Business and sustain it in the long run, entrepreneurs need various sources of Finance.
For example, a Business named ABC enterprises has arranged for the initial capital investment amount with their savings. They have procured offices, equipment, and raw material to start the production work.
A few days later, they need more funds to pay wages regularly and to maintain the stocks of raw materials. To meet such day-to-day operational demands, Businesses will require funds and they can’t depend upon savings solely.
They need various Sources of Business Finance to accumulate funds at any point in time and keep the organization running. However, there can be different sources of Finance depending upon the nature of ownership, equipment, and sources.
Categories of Source of Funds
There are several categories in which these sources of Business Finance can be classified. Have a look and get a brief idea about the same.
1. Based on Ownership
Amongst the other Sources of Finance in Financial Management, this source is divided into two categories.
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Owner’s funds |
Borrowed funds |
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As the name suggests, the funds here are provided by the owner only to Finance various Business activities. |
Here, the funds are acquired by borrowing money or applying for a loan from outside for a predetermined tenor. |
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The capital investment amount is arranged by the entrepreneur through equity shares, preference shares, retained earnings, etc. |
Here, entrepreneurs can borrow funds from financial institutions or non-banking financial companies. |
3. Based on Generation
This source of financing Business is categorised into two kinds
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Internal sources |
External sources |
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In this case, funds are generated within the organisation through different means. |
Here, funds are arranged from the external resources. |
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Entrepreneurs can use the retained earnings or sell the accumulated assets to arrange the funds. |
Debentures, bank loans, issuance of equity shares to the public are some external resources from which entrepreneurs seek funds. |
4. Based on the Period
Depending upon the term or period of these funds, these are divided into three categories. These are mentioned below.
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Long term source of Finance |
Medium-term source of Finance |
Short term source of Finance |
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These funds are for the long term, usually more than 5 years. |
These funds are those that are accumulated for more than 1 year and less than 5 years. |
These funds are for a shorter term, usually less than 1 year. |
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Funds accumulated from the capital market such as equity shares, debenture, etc. are examples of sources of long-term Finance. |
Loans from financial institutions, lease financing, public deposits, commercial papers, etc. are examples of medium-term sources of Finance. |
Trade credits, working capital borrowings from financial institutions, etc. are a few examples of short-term sources of Finance. |
Some Questions to Answer
Medium-term source of Finance is usually accumulated for what period?
Answer: More than 1 year and less than 5 years.
Examples of Business Finance Source
Like the structure of different sources of Finance, the examples of such sources also follow the same structure. These fall under different categories depending upon time, the basis of ownership, or the basis of source generation.
Here are some examples of varied sources using which Businesses can accumulate funds and utilize this money for various operations.
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Equity shares
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Debenture
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Lease Finance
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Venture funding
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Bill discounting
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Preference capital or preference share
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Receivables and payables
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Short term loans
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Term loans from financial institutions
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Advances from various customers
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International financing
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Internal accruals
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Factoring services
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Short term deposits
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Asset securitization, etc.
These are a few examples of varied sources of Businesses Finance using which Businesses arrange for funds. It is crucial to rely upon a single source as unavailability of funds through it can put your Business’s operations on hold.
Therefore, entrepreneurs are introduced to several sources so that they can make use of them as per their Business demand. For instance, one may need limited funds to keep their inventories stocked for a year, and acquiring short-term funds will help Businesses get the same.
Subsequently, entrepreneurs need to realize their Business viability and demand for funds before deciding upon which sources of Business Finance they need.
To learn more about sources of Business Finance, go through the study materials available on our website today. You can also install ’s app to participate in live classes and keep yourself updated.
MCQs and Solved Questions
1. Internal Sources of Capital are those that are
(A) Generated through outsiders such as suppliers
(B) Generated through loans from commercial banks
(C) Generated through issues of shares
(D) Generated within the Business.
Ans: (D) Generated within the Business.
2. Equity Shareholder called
(A) Owners of the company
(B) Partners of the company
(C) Executives of the company
(D) Guardian of the company
Ans: (A) Owners of the company
3. Money obtained by the issue of shares is known as
(A) Debts
(B) Loans
(C) Reserve Funds
(D) Share Capita
Ans: (D) Share Capita
4. Which are the following is an external source of Finance?
(A) Retained Earnings
(B) Equity Shares
(C) Preference Shares
(D) Debentures
Ans: (D) Debentures
5. Investors who want steady income may not prefer
(A) Bonds
(B) Equity Shares
(C) Debentures
(D) None of the above
Ans: (B) Equity Shares
6. The funds needed for buying current assets are
(A) Lease financing.
(B) Working capital requirement.
(C) Fixed capital requirement.
(D)Plowing back profits.
Ans : (b) Working capital requirement.
7. What are internal sources of capital?
(A) Generated through the categorized organization issue of shares.
(B) Generated through outsiders such as suppliers.
(C) Generated within the Business.
(D)Generated through loans from commercial banks.
Ans : (c) Generated within the Business.