Sources of Fund

Sources of Funds

The need for funds: No business can live without funds. Throughout

the life of a business, money is needed continuously. Firms raise money mainly to meet the following three types of need:

1. To start a business as initial expenditure;2. To fund continuous business activities and

money flowing;3. To expand the business.

Sources of Funds

Sources of funds In general, a business may have two major sources of funds which are needed for its business operations. They are internal sources of funds and external sources of funds. See Table 1 for details.

Sources of Funds

Sources of Funds

Sources of funds

Internal Sources

Profit Sales ofAssets

External Sources

Long TermShare CapitalLoan Capital

Short TermOverdraft,

Leasing, etc..

Sources of Funds

Internal Sources:Business generated fund from itself for the development and expansion. it Can be achieved through

1. Profit2. Depreciation3. Sale of Assets

Sources of Funds

Sources of Funds

Internal Sources:1. Profit

It is an important and inexpensive source of finance, for example, the retained earnings of the business. A large part of finance is funded from profit.

Sources of Funds

Internal Sources:2. Depreciation

financial provision for the replacement of old machinery and equipments. Nearly all businesses use depreciation as a source of funds

Sources of Funds

Internal Sources:3. Sale of Assets

When a business can not raise finance from banks or other sources, it may be forced to sell some assets, such as company cars, land property, etc. to solve its urgent financial problems (this activity is called divestment).

Sources of Funds

External Sources:Business Sources from outside the business are known as External sources

1. Long Term Sources2. Short Term Sources

Sources of Funds External Sources:1. Long Term SourcesA. Share Capital

The most important source of funds for a limited company. It is often considered as permanent capital as it is not repaid by the business, but the shareholder can have a share in the profit, called dividend. Three types of shares are:

Ordinary shares: The most common types of shares, and the most riskiest shares. Dividend depends on the profit of firm. But all ordinary shareholders have voting rights.

Preference shares: The share owners receive a fixed rate of return. They carry less risk than ordinary shareholders. But they are not strictly owners of the company.

Deferred shares: These shares are often held by the founders of the company. Deferred shareholders only receive the dividend after the ordinary shareholders have been paid.

Sources of Funds External Sources:1. Long Term SourcesB. Loan Capital

Any money which is borrowed for a long period of time by a business is called loan capital.

Three types of shares are:

Debentures : fixed rate of return, first to be paid

Bank loans and mortgages : suitable for small to medium sized firms where property or some other asset acts as security for the loan

Merchant or Investment Banks : act on behalf of clients to organise and underwrite raising finance

Government/EU : may offer loans in certain circumstances• Grants

Sources of Funds

External Sources:2. Short Term Sources

A. Bank loans : This is a loan which requires a rigid agreement between the borrower and the bank. The amount borrowed must be repaid over a certain period or in regular installments.

B. Overdraft facilities : This is a short term financing from banks.The amount to be overdrawn depends on the needs of the

business at the time and its credit standing.

C. Leasing : provides the opportunity to secure the use of capital without ownership – effectively a hire agreement

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