SOURCES OF FINANCE: AN ANALYSIS

This Final draft is submitted in partial fulfilment of the project in “Financial

Management” for the requirement of the degree of B.B.A. L.L.B(Hons.)

Submitted to: Submitted by:

Mr. Ashok Sharma ASHUTOSH RANJAN

Assistant Professor of Management Roll No. - 2812

B.B.A. LL.B.(Hons.)

Semester – 2nd

Chanakya National Law University, Patna

February, 2023

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 TABLE OF CONTENTS

Contents
ACKNOWLEDGEMENT........................................................................................................................................3
DECLARATION....................................................................................................................................................4
CHAPTER 1 – SOURCES OF FINANCES AN ANALYSIS...........................................................................................5
1.1 Introduction.............................................................................................................................................5
1.1.1. Review of Literature.............................................................................................................................7
1.2 Present Study:-.........................................................................................................................................8
1.2.1. Research Objectives.............................................................................................................................8
1.2.2. Research Questions..............................................................................................................................8
1.3 Hypothesis................................................................................................................................................8
1.4 Research Methodology............................................................................................................................8
1.4.1. Mode of Citation..................................................................................................................................9
1.4.2 Sources of Data.....................................................................................................................................9
1.5 Scope & Limitation of Study....................................................................................................................9
2. CLASSIFICATION OF SOURCES OF FINANCE.................................................................................................10
3. DIFFERENT SOURCES OF FINANCE................................................................................................................11
4.DIFFERENCE BETWEEN EXTERNAL AND INTERNAL SOURCES OF FINANCE....................................................15
5.SOURCES OF FINANCE FOR STARTUPS..........................................................................................................18
6.CONCLUSION AND SUGGESTIONS.................................................................................................................25
Bibliography:-...................................................................................................................................................26

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 ACKNOWLEDGEMENT

I would like to express my profound gratitude and deep regards to my guide, Mr. Ashok
Sharma, Assistant Professor of Management, for assigning me the topic I was most
interested in. It was under his guidance that I structured my project and built on my abilities
to research on the subject.

I owe the present accomplishment of my project to everyone, who helped me immensely with
materials throughout the project and without whom I couldn’t have completed it in the present
way.

I would also like to extend my gratitude to my friends, family members and all those unseen hands
that helped me out at every stage of my project either financially, intellectually or emotionally.

Thank You,
Ashutosh Ranjan
Semester- 2nd
CNLU, Patna

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 DECLARATION

I hereby declare that the work reported in the B.B.A. L.L.B.(Hons.) project report entitled

"Sources of Finance: An analysis " submitted at Chanakya National Law

University, Patna is an authentic record of my work carried out under the supervision of
Mr. Ashok
Kumar. I have not submitted this work elsewhere for any other degree or diploma. I am fully
responsible for the contents of my project report.

(Signature of the candidate)

Ashutosh Ranjan (2812)

B.B.A. LL.B.(Hons.)
2nd Semester
Chanakya National Law University, Patna

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 CHAPTER 1 – SOURCES OF FINANCES AN
ANALYSIS

1.1 Introduction

The source of finance is a provision of finance for a business to fulfil its operational
requirements. This includes short-term working capital, fixed assets, and other investments
in the long term. There are two sources of finance: internal and external. Internal sources of
finance come from inside the business, meanwhile, external sources of finance come from
outside the business. Finance is said to be the “vital blood” of any organisation this is
especially true for a business organisation.
There can be different sources of finance for an organisation depending on the needs and
requirements of the organisation as well as the availability of sources of finance. Study of sources of
finance is very important as Financing is the most vital aspect of running any business. No amount
of management can save a business if it’s financing is weak. Lack of finance can make a business
miss out on many opportunities which it’s competitors with good financing will not.

Classification of Sources of Finance

Businesses can raise capital through various sources of funds which are classified into three categories.

1. Based on Period – The period basis is further divided into three dub-division.

 Long Term Source of Finance – This long term fund is utilized for more than five years. The
fund is arranged through preference and equity shares and debentures etc. and is accumulated
from the capital market.
 Medium Term Source of Finance – These are short term funds that last more than one year
but less than five years. The source includes borrowings from a public deposit, commercial
banks, commercial paper, loans from a financial institute, and lease financing, etc.
 Short Term Source of Finance – These are funds just required for a year. Working Capital
Loans from Commercial bank and trade credit etc. are a few examples of these sources.

2. Based on Ownership – This sources of finance are divided into two categories.

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  Owner’s Fund – This fund is financed by the company owners, also known as owner’s capital.
The capital is raised by issuing preference shares, retained earnings, equity shares, etc. These
are for long term capital funds which form a base for owners to obtain their right to control the
firm’s management and operations.
 Burrowed Funds – These are the funds accumulated with the help of borrowings or loans for a
particular period of time. This source of fund is the most common and popular amongst the
businesses. For example, loans from commercial banks and other financial institutions.

3. Based on Generation – This source of income is categorized into two divisions.

 Internal Sources – The owners generated the funds within the organization. The example for
this reference includes selling off assets and retained earnings, etc.
 External Source – The fund is arranged from outside the business. For instance, issuance of
equity shares to public, debentures, commercial banks loan, etc.1

1
“The Three Sources of Finance” (FutureLearn) https://www.futurelearn.com/info/courses/business-
planning-growth-and-successful-companies-sc/0/steps/222376

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1.1.1. Review of Literature

1. Shivam Pradhan, ‘What are the different sources of finance’, geeksforgeeks.org,

(November 23, 2022 ), https://www.geeksforgeeks.org/what-are-the-different-sources-of-
finance/

This article explains what are sources of finance and different types of sources of
finance and their explanation.

2. Chapter 7 – Sources of finance https://www.fao.org/3/w4343e/w4343e08.htm

This article discuss in detail about the different sources of finance along with their merits and
demerits. After giving a brief overview of different source of finance it discusses all the
external and internal sources of finance in detail.

3. ‘Sources of finance for a new startup’ Accountancy Cloud

https://theaccountancycloud.com/blogs/sources-of-finance-for-a-new-start-up

This article discusses about all the sources of finance available for startups and compares there
effectiveness for a startup business.

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1.2 Present Study:-

1.2.1. Research Objectives

1.) To understand the meaning of sources of finance and its different impacts on an organisation.
2.) To study the different sources of finance with the view of understanding it’s impact on an
organisations success and failure.
3.) To do a comparison between the risk and rewards of different sources of finance.

1.2.2. Research Questions

1.) What is the importance of sources of finance for an organisation?

2.) How different sources of finance affect the business organisation in different manner?
3.) How should sources of finance be chosen for an organisation in order to bring
maximum profitability and minimum risk?

1.3 Hypothesis

In this project report, the researcher presumes that sources of finance are a determining factor in
an organisations success or failure.

1.4 Research Methodology

The researcher has adopted a purely doctrinal method of research. The study is based on
various primary and secondary sources of data collection such as websites of numerous
organizations, books, journals, articles and research papers.

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 1.4.1. Mode of Citation

The researcher has followed the citation style as mentioned in the Bluebook 20th Edition.

1.4.2 Sources of Data

The study is based on data collected from various secondary sources such as websites of numerous
organizations, books, journals, articles and research papers.

1.5 Scope & Limitation of Study

The scope of the study of the researcher is to know about different Sources of Finance and it’s
impact on an organisation.

The limitation of the study is that it is more inclined to know impacts of sources of finance on a
business organisation only.

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 PROJECT CHAPTERS

2. CLASSIFICATION OF SOURCES OF FINANCE

Businesses can raise capital through various sources of funds which are classified into three categories.

1. Based on Period – The period basis is further divided into three sub-division.

 Long Term Source of Finance – This long term fund is utilized for more than five years. The
fund is arranged through preference and equity shares and debentures etc. and is accumulated
from the capital market.
 Medium Term Source of Finance – These are short term funds that last more than one year
but less than five years. The source includes borrowings from a public deposit, commercial
banks, commercial paper, loans from a financial institute, and lease financing, etc.
 Short Term Source of Finance – These are funds just required for a year. Working Capital
Loans from Commercial bank and trade credit etc. are a few examples of these sources.

2. Based on Ownership – This sources of finance are divided into two categories.

 Owner’s Fund – This fund is financed by the company owners, also known as owner’s capital.
The capital is raised by issuing preference shares, retained earnings, equity shares, etc. These
are for long term capital funds which form a base for owners to obtain their right to control the
firm’s management and operations.
 Burrowed Funds – These are the funds accumulated with the help of borrowings or loans for a
particular period of time. This source of fund is the most common and popular amongst the
businesses. For example, loans from commercial banks and other financial institutions.

3. Based on Generation – This source of income is categorized into two divisions.

 Internal Sources – The owners generated the funds within the organization. The example for
this reference includes selling off assets and retained earnings, etc.
 External Source – The fund is arranged from outside the business. For instance, issuance of
equity shares to public, debentures, commercial banks loan, etc.

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 3. DIFFERENT SOURCES OF FINANCE

1. Retained Earnings:
Most of the time, a business does not distribute all of its profits to its shareholders in the
form of dividends. A portion of the net income may be kept by the business for use in the
future. These are referred to as retained earnings. It serves as a means of internal funding,
self financing, or profit-sharing. The amount of profit that can be reinvested in a company
depends on a number of variables, including net profits, the dividend policy, and the
company's age.
2. Trade Credit:
Trade credit is credit given by one trader to another for the purchase of products and services. Trade
credit facilitates the purchase of goods without the need for immediate payment. Such credit shows
in the buyer of goods’ records as ‘sundry creditors’ or ‘accounts payable.’ Business organisations
frequently utilise trade credit as a form of short-term finance. It is granted to consumers that have a
solid financial status and a good reputation. The amount and period of credit provided are
determined by criteria, such as the purchasing firm’s reputation, the seller’s financial status, the
number of purchases, the seller’s payment history, and the market’s level of competition. Trade
credit terms might differ from one industry to another and from one person to another. 2

3. Factoring:
Factoring is a financial service in which the ‘factor’ provides a variety of services such as :
• Bill discounting (with or without recourse) and debt collection for the client: Under this,

receivables from the sale of goods or services are sold to the factor at a certain discount. The
factor takes over all credit control and debt collection from the buyer and protects the
company against any bad debt losses.
Factoring has basic two methods: Recourse and Non-recourse.
The customer is not safeguarded against the risk of bad debts while using recourse factoring.
Non-recourse factoring, on the other hand, involves the factor assuming the complete credit
risk, which means that the full amount of the invoice is reimbursed to the client if the debt
goes bad

2
“Chapter 7 - Sources of Finance” (Chapter 7 - Sources of finance)
https://www.fao.org/3/w4343e/w4343e08.htm

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 • Factors retain vast volumes of information on the trading history of businesses, which they
use to provide information about the creditworthiness of prospective clients, among other
things. This can be beneficial to individuals that use factoring services, and therefore avoid
doing business with consumers who have a bad payment history. Factors may also provide
appropriate consulting services in areas, like finance, marketing, and so forth.

4. Public Deposits:
Public deposits are deposits gathered from the public by organisations. Interest rates on public
deposits are often higher than those on bank deposits. Anyone who wants to make a monetary
contribution to an organisation can do so by filling a specified form.

In return, the organisation gives a deposit receipt as proof of payment. A business’s medium and
short-term financial needs can be met through public deposits. Deposits are beneficial to both the
depositor and the organisation. While depositors receive higher interest rates than banks, the cost of
deposits to the corporation is lower than the cost of borrowing from banks. Companies often seek
public deposits for up to three years. The Reserve Bank of India regulates the acceptance of public
deposits.

5. Commercial Papers:
Commercial Paper (CP) is an unsecured promissory note. It was first created in India in 1990 to
allow highly rated corporate borrowers to diversify their sources of short-term borrowings and to
give investors an additional instrument.

Following that, primary dealers and all-India financial institutions were authorised to issue CP in
order to cover their short-term funding needs for their operations. Individuals, banks, other corporate
organisations (registered or incorporated in India), unincorporated bodies, Non-Resident Indians
(NRIs), and Foreign Institutional Investors (FIIs), among others, can invest in CPs. CP can be issued
in denominations of Rs.5 lakh or multiples thereof with maturities varying from 7 days to up to one
3
year from the date of issue.

6. Issue of Shares:

3
(StudySmarter US) https://www.studysmarter.us/explanations/business-studies/financial-
performance/sources-of-finance/

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A share is the smallest unit of a company’s capital. The firm’s capital is split into small units and
issued to the public as shares. The capital gained via the issuance of shares is referred to as ‘Share
Capital.’ It’s a kind of Owner’s Fund.

There are two kinds of shares that can be issued:

• Equity Shares: These are shares that do not pay a fixed dividend, but do have ownership
and voting rights. Owner of the firm refers to the company’s equity shareholders. They
do not get a set dividend, but are paid dependent on the company’s profitability.
• Preference Shares: Preference shares are shares that have a slight preference over equity
shares. Preference Shareholders get a set dividend rate and have the right to receive their
capital before equity shareholders in case of liquidation. They do not, however, have any
voting rights in the company’s management.

7. Debentures:
Debentures are an effective instrument for raising long-term debt capital. A firm can raise capital
by issuing debentures with a fixed rate of interest. A firm’s debenture is a recognition that the
company has borrowed a specified amount of money, which it commits to repay at a later period.
Debenture holders are part of the company as the company’s creditors. Debenture holders get a
definite stated amount of interest at predetermined periods, such as six months or a year.

Debentures issued publicly must be assessed by a credit rating agency such as CRISIL (Credit
Rating and Information Services of India Ltd.) on factors such as the company’s track record,
profitability, debt payment capability, creditworthiness, and perceived risk of lending.

8. Commercial Banks:
Commercial banks play an important role in providing finances for a variety of purposes
and time periods. Banks provide loans to businesses in a variety of ways, including cash
credits, overdrafts, term loans, bill discounting and the issuance of letters of credit. The
interest rate imposed on such credits varies depending on the bank as well as the nature,
amount, and duration of the loan.

9. Financial Institutions:

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 The government has established many financial institutions in the country to give financing to
businesses. They provide both owned and loan capital for long- and medium-term needs.
These organisations are often known as ‘Development Banks’ since they aim to promote a
country’s industrial development. In addition to financial help, these institutes conduct
surveys and provide organisations with technical assistance and management services.
Financial institutions provide funds for the expansion, reorganisation and modernisation of
an enterprise.
10. Lease Financing
A lease is a contractually enforceable arrangement whereby a one party, the owner of an
asset, grants the other party the right to use the asset in exchange for a monthly payment. In
other terms, it is the rental of an asset for a certain amount of time. The party who owns the
assets is known as the ‘lessor,’ while the party who utilises the assets is known as the
‘lessee.’ The lessee pays the lessor a predetermined periodic sum known as lease rental in exchange
for the usage of the asset.4

4
See (eFinanceManagement, April 28, 2022) https://efinancemanagement.com/sources-of-finance

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 4.DIFFERENCE BETWEEN EXTERNAL AND INTERNAL
SOURCES OF FINANCE

Business implies a commercial activity of producing and distributing goods and services to final
consumers for a profit. To undertake various business activities, an entity requires money and thus,
finance is said to be the spine of business, that keeps it going. The capital brought in, to the business by
the proprietor is not sufficient to fulfill the financial needs and so he/she looks for new ways to fulfill
fixed capital and working capital needs. Based on the source of generation, it is classified as internal
and external sources, wherein former covers those means which are generated within the business.
Conversely, the latter implies the sources of funds that are outside the business like finance provided by
investors, lending institutions etc.

A firm can raise funds from different sources, wherein each source has distinct features. One should
understand the basic features of the sources of finance so as to identify the best available source to meet
out financial requirements. Here, in the given article we are going to talk about the differences between
internal and external sources of finance.

Comparison Chart

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Definition of Internal Sources of Finance

In business, internal sources of finance delineate the funds raised from existing assets and day to day
operations of the concern. It aims at increasing the cash generated from regular business activities. For
this purpose, evaluation and control of costs are made, along with reviewing the budget. Moreover, the
credit terms with customers are verified, so as to effectively manage the collection of receivables.

Internal sources of finance include selling of surplus inventories, ploughing back of profit, accelerating
collection of receivables, and so on.

Definition of External Sources of Finance

External sources of finance refer to the cash flows generated from outside sources of the organization,
whether from private means or from the financial market. In external financing, the funds are arranged
from the sources outside the business. There are two types of external sources of finance, i.e. long term
source of finance and short term sources of finance. Further on the basis of nature, they can be
classified as:

 Debt financing: The source of finance wherein fixed payment has to be made to the lenders is
debt financing. It includes:
o Bank loans
o Corporate Bonds
o Leasing
o Commercial Paper

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 o Trade Credit
o Debentures
 Equity Financing: Equity is the major source of finance for most of the companies which
indicate the share in the ownership of the firm and the interest of the shareholders. The firms
raise capital by selling its shares to the investors. It includes:
o Ordinary shares
o Preference shares

Key Differences Between Internal and External Sources of Finance

The points given below explain the difference between internal and external sources of finance:

1. When the cash flows are generated from sources inside the organization, it is known as internal
sources of finance. On the other hand, when the funds are raised from the sources external to the
organization, whether from private sources or from the financial market, it is known as external
sources of finance.
2. Internal sources of finance include Sale of Stock, Sale of Fixed Assets, Retained Earnings and
Debt Collection. In contrast, external sources of finance include Financial Institutions, Loan
from banks, Preference Shares, Debenture, Public Deposits, Lease financing, Commercial
paper, Trade Credit, Factoring, etc.
3. While internal sources of finance are economical, external sources of finance are expensive.
4. Internal sources of finance do not require collateral, for raising funds. Conversely, assets are
sometimes mortgaged as security, so as to raise funds from external sources.
5. Amount raised from internal sources is less and they can be put to a limited number of uses. On
the contrary, large amounts can be raised from external sources, which have various uses.5

5
staff T compared, “Internal vs External Sources of Finance - Definitions, Explanations, Differences |
Termscompared” (Termscompared, January 23, 2020) https://www.termscompared.com/internal-vs-
external-sources-of-finance/

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 5.SOURCES OF FINANCE FOR STARTUPS

Financing is needed to start a business and ramp it up to profitability. There are several
sources to consider when looking for start-up financing. But first you need to consider how
much money you need and when you will need it.

The financial needs of a business will vary according to the type and size of the business. For
example, processing businesses are usually capital intensive, requiring large amounts of
capital. Retail businesses usually require less capital.

Debt and equity are the two major sources of financing. Government grants to finance certain aspects
of a business may be an option. Also, incentives may be available to locate in certain communities or
encourage activities in particular industries.

Equity Financing

Equity financing means exchanging a portion of the ownership of the business for a financial
investment in the business. The ownership stake resulting from an equity investment allows the
investor to share in the company’s profits. Equity involves a permanent investment in a company and is
not repaid by the company at a later date.

The investment should be properly defined in a formally created business entity. An equity stake in a
company can be in the form of membership units, as in the case of a limited liability company or in the
form of common or preferred stock as in a corporation.

Companies may establish different classes of stock to control voting rights among shareholders.
Similarly, companies may use different types of preferred stock. For example, common stockholders
can vote while preferred stockholders generally cannot. But common stockholders are last in line for
the company’s assets in case of default or bankruptcy. Preferred stockholders receive a predetermined
dividend before common stockholders receive a dividend.6

6
“Sources of Finance for a New Startup” (Accountancy Cloud)
https://theaccountancycloud.com/blogs/sources-of-finance-for-a-new-start-up

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Personal Savings
The first place to look for money is your own savings or equity. Personal resources can include profit-
sharing or early retirement funds, real estate equity loans, or cash value insurance policies.

Life insurance policies - A standard feature of many life insurance policies is the owner’s ability to
borrow against the cash value of the policy. This does not include term insurance because it has no cash
value. The money can be used for business needs. It takes about two years for a policy to accumulate
sufficient cash value for borrowing. You may borrow most of the cash value of the policy. The loan
will reduce the face value of the policy and, in the case of death, the loan has to be repaid before the
beneficiaries of the policy receive any payment.

Home equity loans - A home equity loan is a loan backed by the value of the equity in your home. If
your home is paid for, it can be used to generate funds from the entire value of your home. If your
home has an existing mortgage, it can provide funds on the difference between the value of the house
and the unpaid mortgage amount. For example, if your house is worth $250,000 with an outstanding
mortgage of $160,000, you have $90,000 in equity you can use as collateral for a home equity loan or
line of credit. Some home equity loans are set up as a revolving credit line from which you can draw
the amount needed at any time. The interest on a home equity loan is tax deductible.

Friends and Relatives

Founders of a start-up business may look to private financing sources such as parents or friends. It may
be in the form of equity financing in which the friend or relative receives an ownership interest in the
business. However, these investments should be made with the same formality that would be used with
outside investors.

Venture Capital
Venture capital refers to financing that comes from companies or individuals in the business of
investing in young, privately held businesses. They provide capital to young businesses in exchange for
an ownership share of the business. Venture capital firms usually don’t want to participate in the initial
financing of a business unless the company has management with a proven track record. Generally,
they prefer to invest in companies that have received significant equity investments from the founders
and are already profitable.

Venture capital investors also prefer businesses that have a competitive advantage or a strong value
proposition in the form of a patent, a proven demand for the product, or a very special (and protectable)

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idea. They often take a hands-on approach to their investments, requiring representation on the board of
directors and sometimes the hiring of managers. Venture capital investors can provide valuable
guidance and business advice. However, they are looking for substantial returns on their investments
and their objectives may be at cross purposes with those of the founders. They are often focused on
short-term gain.

Venture capital firms are usually focused on creating an investment portfolio of businesses with high-
growth potential resulting in high rates of returns. These businesses are often high-risk investments.
They may look for annual returns of 25-30% on their overall investment portfolio.

Because these are usually high-risk business investments, they want investments with expected returns
of 50% or more. Assuming that some business investments will return 50% or more while others will
fail, it is hoped that the overall portfolio will return 25-30%.

More specifically, many venture capitalists subscribe to the 2-6-2 rule of thumb. This means that
typically two investments will yield high returns, six will yield moderate returns (or just return their
original investment), and two will fail.

Angel Investors
Angel investors are individuals and businesses that are interested in helping small businesses survive
and grow. So their objective may be more than just focusing on economic returns. Although angel
investors often have somewhat of a mission focus, they are still interested in profitability and security
for their investment. So they may still make many of the same demands as a venture capitalist.

Angel investors may be interested in the economic development of a specific geographic area in which
they are located. Angel investors may focus on earlier stage financing and smaller financing amounts
than venture capitalists.7

7
“Top 10 Sources of Funding to Grow Your Startup Business” (NeoITO Blog, February 9, 2022)
https://www.neoito.com/blog/sources-of-funding-startup/

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Government Grants
Federal and state governments often have financial assistance in the form of grants or tax credits for
start-up or expanding businesses.

Equity Offerings
In this situation, the business sells stock directly to the public. Depending on the circumstances, equity
offerings can raise substantial amounts of funds.  The structure of the offering can take many forms and
requires careful oversight by the company’s legal representative.

Initial Public Offerings

Initial Public Offerings (IPOs) are used when companies have profitable operations, management
stability, and strong demand for their products or services. This generally doesn’t happen until
companies have been in business for several years. To get to this point, they usually will raise funds
privately one or more times.8

Warrants
Warrants are a special type of instrument used for long-term financing. They are useful for start-up
companies to encourage investment by minimizing downside risk while providing upside potential. For
example, warrants can be issued to management in a start-up company as part of the reimbursement
package.

A warrant is a security that grants the owner of the warrant the right to buy stock in the issuing
company at a pre-determined (exercise) price at a future date (before a specified expiration date). Its
value is the relationship of the market price of the stock to the purchase price (warrant price) of the
stock. If the market price of the stock rises above the warrant price, the holder can exercise the warrant.
This involves purchasing the stock at the warrant price. So, in this situation, the warrant provides the
opportunity to purchase the stock at a price below current market price.

If the current market price of the stock is below the warrant price, the warrant is worthless because
exercising the warrant would be the same as buying the stock at a price higher than the current market

8
Dubielska K, “10 Top Funding Sources To Grow Your Startup” (Overview Of Top Funding Sources
To Grow Your Startup) https://vestbee.com/blog/articles/overview-of-top-funding-sources-to-grow-
your-startup

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price. So, the warrant is left to expire. Generally warrants contain a specific date at which they expire if
not exercised by that date.9

Debt Financing

Debt financing involves borrowing funds from creditors with the stipulation of repaying the borrowed
funds plus interest at a specified future time. For the creditors (those lending the funds to the business),
the reward for providing the debt financing is the interest on the amount lent to the borrower.

Debt financing may be secured or unsecured. Secured debt has collateral (a valuable asset which the
lender can attach to satisfy the loan in case of default by the borrower). Conversely, unsecured debt
does not have collateral and places the lender in a less secure position relative to repayment in case of
default.

Debt financing (loans) may be short-term or long-term in their repayment schedules. Generally, short-
term debt is used to finance current activities such as operations while long-term debt is used to finance
assets such as buildings and equipment.

Friends and Relatives

Founders of start-up businesses may look to private sources such as family and friends when starting a
business. This may be in the form of debt capital at a low interest rate. However, if you borrow from
relatives or friends, it should be done with the same formality as if it were borrowed from a commercial
lender. This means creating and executing a formal loan document that includes the amount borrowed,
the interest rate, specific repayment terms (based on the projected cash flow of the start-up business),
and collateral in case of default.

Banks and Other Commercial Lenders

Banks and other commercial lenders are popular sources of business financing. Most lenders require a
solid business plan, positive track record, and plenty of collateral. These are usually hard to come by

9
“Sources and Tips for Startup Business Financing” (The Balance, September 23, 2022)
https://www.thebalancemoney.com/six-sources-of-startup-business-financing-393415

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for a start-up business. Once the business is underway and profit and loss statements, cash flow
budgets, and net worth statements are provided, the company may be able to borrow additional funds.

Commercial Finance Companies

Commercial finance companies may be considered when the business is unable to secure financing
from other commercial sources. These companies may be more willing to rely on the quality of the
collateral to repay the loan than the track record or profit projections of your business. If the business
does not have substantial personal assets or collateral, a commercial finance company may not be the
best place to secure financing. Also, the cost of finance company money is usually higher than other
commercial lenders.

Government Programs
Federal, state, and local governments have programs designed to assist the financing of new ventures
and small businesses. The assistance is often in the form of a government guarantee of the repayment
of a loan from a conventional lender. The guarantee provides the lender repayment assurance for a loan
to a business that may have limited assets available for collateral. The best known sources are the Small
Business Administration and USDA Rural Development.

Bonds
Bonds may be used to raise financing for a specific activity. They are a special type of debt financing
because the debt instrument is issued by the company. Bonds are different from other debt financing
instruments because the company specifies the interest rate and when the company will pay back the
principal (maturity date). Also, the company does not have to make any payments on the principal (and
may not make any interest payments) until the specified maturity date. The price paid for the bond at
the time it is issued is called its face value.

When a company issues a bond it guarantees to pay back the principal (face value) plus interest. From a
financing perspective, issuing a bond offers the company the opportunity to access financing without
having to pay it back until it has successfully applied the funds. The risk for the investor is that the
company will default or go bankrupt before the maturity date. However, because bonds are a debt
instrument, they are ahead of equity holders for company assets.

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Lease

A lease is a method of obtaining the use of assets for the business without using debt or equity
financing. It is a legal agreement between two parties that specifies the terms and conditions for the
rental use of a tangible resource, such as a building or equipment. Lease payments are often due
annually. The agreement is usually between the company and a leasing or financing organization and
not directly between the company and the organization providing the assets. When the lease ends, the
asset is returned to the owner, the lease is renewed, or the asset is purchased.

A lease may have an advantage because it does not tie up funds from purchasing an asset. It is often
compared to purchasing an asset with debt financing where the debt repayment is spread over a period
of years. However, lease payments often come at the beginning of the year where debt payments come
at the end of the year. So, the business may have more time to generate funds for debt payments,
although a down payment is usually required at the beginning of the loan period. 10

6.CONCLUSION AND SUGGESTIONS

10
Harroch R, “Startup Financing: 5 Key Funding Options For Your Company” (Forbes, December 22,
2019) https://www.forbes.com/sites/allbusiness/2019/12/22/startup-financing-key-options/

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Corporations often need to raise external funding or capital in order to expand their businesses into
new markets or locations. It also allows them to invest in research & development (R&D) or to
fend off the competition. And, while companies do aim to use the profits from ongoing business
operations to fund such projects, it is often more favorable to seek external lenders or investors to
do so.
Despite all the differences among the thousands of companies in the world across various industry
sectors, there are only a few sources of funds available to all firms. Some of the best places to look
for funding are retained earnings, debt capital, and equity capital. In this article, we examine each
of these sources of capital and what they mean for corporations.

Key Takeaways

 Companies need to raise capital in order to invest in new projects and grow.
 Retained earnings, debt capital, and equity capital are three ways companies can raise capital.
 Using retained earnings means companies don't owe anything but shareholders may expect an
increase in profits.
 Companies raise debt capital by borrowing from lenders and by issuing corporate debt in the
form of bonds.
 Equity capital, which comes from external investors, costs nothing but has no tax benefits.

Bibliography:-

 https://www.geeksforgeeks.org/what-are-the-different-sources-of-finance/
 https://www.extension.iastate.edu/agdm/wholefarm/html/c5-92.html

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 https://keydifferences.com/difference-between-internal-and-external-sources-of-finance.html
 https://corporatefinanceinstitute.com/resources/accounting/sources-of-funding/
 https://www.futurelearn.com/info/courses/business-planning-growth-and-successful-companies-sc/
0/steps/222376
 https://www.bbc.co.uk/bitesize/guides/zj7yy9q/revision/1
 https://taxguru.in/finance/types-sources-business-financing.html
 http://businessnewsthisweek.com/business/5-major-sources-of-finance/

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