Chapter 7 Source of Finance PDF

ESOFT METRO CAMPUS
BUSINESS IN PRACTICE
Module Code – CI7600
By
Pradeep Alexander
MBA (Finance), MA in Financial Economics, MSc in Proj.Mgt.
Bcom.Sp.Acc.Hons, ICMA, CILT, CA-Inter, ACCA-Skill .

Chapter - 07
Source of Finance
Financial Information:
1. Financial Accounts / Financial Statements

2. Cost & Management Accounts
3. Financial Management / Fund Management
Sources of Finance
Sources of finance for business are equity, debt,

debentures, retained earnings, term loans, working capital
loans, letter of credit, euro issue, venture funding, etc.
These sources of funds are used in different situations.
They are classified based on time period, ownership and
control, and their source of generation.
According to Time Period:
LONG TERM SOURCES OF FINANCE MEDIUM TERM SOURCES OF SHORT TERM SOURCES OF
/ FUNDS FINANCE / FUNDS FINANCE / FUNDS
Share Capital or Equity Shares Preference Capital or Preference Shares Trade Credit
Preference Capital or Preference Shares Debenture / Bonds Factoring Services
Retained Earnings or Internal Accruals Lease Finance Bill Discounting etc.
Debenture / Bonds Hire Purchase Finance Advances received from customers
Medium Term Loans from Financial Short Term Loans like Working
Term Loans from Financial Institutes,
Institutes, Government, and Commercial Capital Loans from Commercial
Government, and Commercial Banks
Banks Banks
Venture Funding Fixed Deposits (<1 Year)
Asset Securitization Receivables and Payables

Long-Term Sources of Finance
Long term finance 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 business are funded using long-term sources of finance.
Part of working capital which permanently stays with the business is also
financed with long-term sources of funds.
Medium Term Sources of Finance
Medium term financing means financing for a period of 3 to 5 years and is
used generally for two reasons. One, when long-term capital is not
available for the time being and second when deferred revenue
expenditures like advertisements are made which are to be written off over
a period of 3 to 5 years.
Short Term Sources of Finance
Short term financing means financing for a period of less than 1 year. The
need for short-term finance arises to finance the current assets of a
business like an inventory of raw material and finished goods, debtors,
minimum cash and bank balance etc. Short-term financing is also named
as working capital financing.
According to Ownership and Control:
Sources of finances are classified based on ownership and control over the business. These two
parameters are an important consideration while selecting a source of funds for the business.
Whenever we bring in capital, there are two types of costs – one is the interest and another is
sharing ownership and control. Some entrepreneurs may not like to dilute their ownership rights
in the business and others may believe in sharing the risk.
OWNED CAPITAL BORROWED CAPITAL

Equity Financial institutions,
Preference Commercial banks
Retained Earnings The general public in case of debentures.
Convertible Debentures
ACCORDING TO SOURCE OF GENERATION:
INTERNAL SOURCES EXTERNAL SOURCES
Retained profits Equity
Reduction or controlling of working capital Debt or Debt from Banks
All others except

Sale of assets etc. mentioned in Internal
Sources
The difference between debt and equity finance
Two of the main types of finance available are:
Debt finance – money provided by an external lender, such as a bank,

building society or credit union.
Equity finance – money sourced from within your business.

Sources of debt finance
Financial institutions;
Banks, building societies and credit unions offer a range of finance
products – both short and long-term. These include:
Ø business loans
Ø lines of credit
Ø overdraft services
Ø invoice financing
Ø equipment leases
Ø asset financing.
Retailers;
If you need finance to buy goods like furniture, technology or
equipment, many stores offer store credit through a finance company.
Generally, this is a higher interest option. It suits businesses that can
pay the loan off quickly within the interest-free period.
Suppliers;
Most suppliers offer trade credit. This allows your business to delay
payment for goods. Trade credit terms vary. You may only get it if your
business has a good reputation with the supplier.
Finance companies;
Most finance companies offer finance products through retailers.
Finance companies must be registered at Central bank or banking
authority of the country.
Factor companies;
Factor companies provide finance by buying a business's outstanding
invoices at a discount. The factor company then chases up the debtors.
This is a quick way to get cash, but can be expensive compared to
traditional financing options.
Family or friends;
If a friend or relative offers you a loan, it's called a debt finance
arrangement. Before you decide on this option, think carefully about
how this arrangement could affect your relationship.
Sources of equity finance
Self-funding;
Often called 'bootstrapping', self-funding is often the first step in
seeking finance. It involves funding from your personal finances and
business revenue. Investors and lenders will expect some self-funding
before they agree to offer you finance
.
Family or friends;
Offering a partnership or share in your business to family or friends in
return for equity is often an easy way to get finance. However,
consider this option carefully to make sure it doesn’t affect your
relationship.
Private investors;
Investors can contribute funds to your business in return for a share in
your profits and equity. Investors (such as business angels) can also
work in your business to provide expertise and advice.
Venture capitalists;
These are often big corporations that invest large amounts in start-up
businesses. The businesses usually need to have potential for high
growth and profits. Venture capitalists:
Ø typically require a large controlling share of your business
Ø often provide management or industry expertise.
Stock market
Also known as an Initial Public Offering (IPO), floating on the stock
market involves publicly offering shares to raise capital. This can be a
more expensive and complex option. There is also a risk of not raising
the funds you need due to poor market conditions.
Government
In general, the government doesn't provide finance for starting up or
buying a business. However, you may be suitable for a grant to:
Ø conduct research and development
Ø expand your business
Ø innovate
Ø export your goods and services overseas.
Stock market
Also known as an Initial Public Offering (IPO), floating on the stock
market involves publicly offering shares to raise capital. This can be a
more expensive and complex option. There is also a risk of not raising
the funds you need due to poor market conditions.
Crowdfunding
Crowdfunding is way to raise money by asking a large number of people
each to invest in or donate to your product idea or project. It usually done
through the internet.
Some websites offer a crowdfunding platform for your product idea or
project.
There are four main types of crowdfunding you can use to get finance for
your business. Each uses a different way to attract funding and may have
different tax responsibilities for the parties involved.
Types of Crowdfunding
Ø Donation-based crowdfunding- contributor makes a payment to your business
without receiving anything in return
Ø Reward-based crowdfunding- you give the contributor a reward, (such as
goods or services or a discount), in return for their payment.
Ø Equity-based crowdfunding- small to medium-sized companies to raise money
for their business
Ø Debt-based crowdfunding- contributor lends money to your business and you
agree to pay interest and repay principal on the loan
Case Study
Select the one Quoted/Listed company annual financial statements and

identify the different types of source of finance.
References
Ø Benedict, A and Elliott, B. (2008). Financial accounting: an introduction. Australia: Persons
Education.
Ø Horngren, H, Best, B. and Willett, F. (2006). Financial accounting. Australia: Pearson Education.
Ø Augustine, B, and Elliott, B. (2001). Practice accounting. USA: Prentice Hall.
Ø Frank, W. and Sangster A. (1999). Business accounting 1. 8th ed. London: Pitman Publishing.
Ø Wood, F. and Sangster, A. (1999). Business accounting 11. 7th ed. London. Pitman Publishing.
Ø The Institute of Chartered Accountants, IFRS, IAS (Accounting Standards Books)
Ø Drury, C (2007). Management and cost accounting. India: Thomson Learning.
Ø Horngren, C. T, Sundem, G. L and Stratton, W. O. (2010). Introduction to management accounting.
New Delhi: Prentice Hall.
Ø Kaplan, R.S. (1987). Relevance lost: the rise and fall of management accounting. USA: Harvard
University Press.
Ø Philips Kottler, Marketing Management.
Thank you

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ESOFT METRO CAMPUS

Bcom.Sp.Acc.Hons, ICMA, CILT, CA-Inter, ACCA-Skill .

1. Financial Accounts / Financial Statements

Sources of finance for business are equity, debt,

Preference Capital or Preference Shares Debenture / Bonds Factoring Services

Retained Earnings or Internal Accruals Lease Finance Bill Discounting etc.

Debenture / Bonds Hire Purchase Finance Advances received from customers

Venture Funding Fixed Deposits (<1 Year)

Asset Securitization Receivables and Payables

OWNED CAPITAL BORROWED CAPITAL

INTERNAL SOURCES EXTERNAL SOURCES

Retained profits Equity

Reduction or controlling of working capital Debt or Debt from Banks

All others except

Two of the main types of finance available are:

Debt finance – money provided by an external lender, such as a bank,

Equity finance – money sourced from within your business.

Select the one Quoted/Listed company annual financial statements and

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