Sources of Finance
There are two main categories of sources from which the businessmen can get the required funds for their business. These are:
- Internal sources
- External sources
To start a business the businessman either invests his own money or borrows from outsiders or uses both the sources. When the businessman invests his own money (called owner’s capital), and retains a part of the profits earned in the business it constitute the internal sources of finance. It is an integral part of every business organisation and it is cost effective. But, this source has its own limitations.
Hence the business houses have to resort to the external sources of finance. The various external sources from where businessmen can get the finance include, friends and relatives, banks and other financial institutions, moneylenders, capital market, manufacturers and producers, customers, foreign financial institutions and agencies, etc.
The scope of raising funds also depends upon the nature and form of business organisation. For example, a sole proprietorship form of business organisation has very limited sources from which it can arrange funds for the business. These are:
- Own Savings
- Friends and Relatives
- Moneylenders
- Commercial Banks
- Finance Companies
- Manufactures and Suppliers
- Retained Profits
The same sources of financing are also available in case of partnership firms. In both sole proprietorship and partnership form of business organisation, long term capital is generally provided by the owners themselves by way of investing their own savings and retaining a part of the profits generated by the business and the rest of the sources are mostly used for their short-term financial needs.
However, in case of companies, the following are the usual sources of finance:
- Capital Market
- Financial Institutions
- Public Deposits
- Commercial Banks
- Leasing Companies
- Investment Trusts
- Retained Profits