What is a source of finance for a company? How to classify it?

As we all know to remain in a market every business require capital for expansion, production, modernisation and also for meeting day to day expenses etc. From where, company raises its fund is called the source of finance.

Classification of sources of finance:

1.       On the basis of Time:

The fund which are payable after 5 to 10 year is known as long term funds. The long term funds are used to purchase assets, expansion and modernization etc.

The fund which are payable within a year or in a month is known as Short term funds. It is also called Working Capital Financing.

The funds which are required for 3 to 5 years are known as Medium term funds. These funds are used for written off of deferred revenue expenses (those expenses that are currently occurred but company gets benefit of it for one or more year).

Long term source of finance are:

·         Equity Capital: It is issued by the company to raise capital through public and giving a right to participate in the management.

·         Debenture/ Bond: It is a loan certificate on which company pay interest to its holders.

·         Preference Share Capital: It is also issued to raise capital but it only gives fixed percentage of dividend to its holders.

·         Loan from Financial Institution: Company can borrow money from bank in the form of loan by giving some security to bank that shows they can pay there loan amount in loan period.

·         Retained Earnings: It is a surplus of company which kept aside for use in expansion and future expenses.

·         Asset Securitization: It means using the assets as security for taking loan or debt .

·         Venture Capital: It is fund provided to new company to develop its market.

·         Derivatives: It is a contract whose value is derived by other assets.

·         Fixed deposits: A certain amount of money invested for fixed period in bank.

Medium term source of finance are:

·         Equity Capital

·         Preference Capital

·         Loan from Financial institution, Commercial bank etc.

Short term source of finance:

·         Trade Credit: An agreement where purchaser purchases goods on credit from supplier.

·         Commercial Bank Loan

·         Lease: A contract where lessee can use Lessor’s assets for fixed period.

·         Hire Purchase: To purchase goods on instalments after paying down payments to seller.

·         Bank Overdraft: It is a facility provides by banker to his customer that he can withdraw money from his account even his account shows zero balance.

·         Factoring: Company sell its bill receivable to third party at discount to meet business requirements.

·         Promissory note: It is promise note that written by one party to pay certain amount in future to another party.

·         Bill discounting: Submitting a bill before its due date and after deducting some amount balance are given to bearer and when it matures the holder gets full amount.

·         Payable: It is a short term debt owed by company.

·         Creditors: A person or institution who lend money to company.

·         Credit Card: It is an electronic plastic card and with the help of it card holder purchase goods in credit.

·         Line of credit: It is an agreement between bank and its customer to manage the financial position.

2.       On the basis of Source of generation:

Internal Source: It includes the funds which are available within a company that is known as internal source. For example: Retained Earnings, Depreciation fund and Reserves.

External Source: The Company gets the fund from the outsiders or public to finance its assets. For example: Loan from banks, Debenture etc.  

3.       On the basis of Ownership:

Owned Capital: That fund which gives the power to control the management of a company is known as Owned Capital. For example: Equity Capital.

Borrowed Capital: that funds which are borrowed from outsiders or general public are called Borrowed Capital. For Example: Debenture, Bonds, Public deposits.