Sources of finance

 Finance is that business activity which is concerned with the acquisition and conversion of capital fund in meeting the financial needs and overall objectives of business enterprise. 

For every business enterprise, there are two source of business finance. (1) OWNER'S FUND (2) BORROWED FUND

Owner's fund refers to the fund contributed by owners as well as the accumulated profit of the company. This fund remains with the company and it has no liability to return this fund. Few main features of owners fund are:

• Source of permanent capital.
• Provision of risk capital.
• No security required.
• source of owner's fund. 

Borrowed fund refers to the borrowing of the firm. It include all funds available by way of loans or credit. Few main features of borrowed fund are:

• It is for fixed time.
• Fund is generated against the security of assets.
• Regular payment of interest. 
• The borrowed fund security holder do not get the right to control the activities of the business.
• Source of borrowed fund.

Now there are various source of finance under owner's fund and borrowed fund.

OWNER'S FUND

1. Equity shares : shares means a share in the share capital of a company and includes stock. Equity is common security issued under permanent or owner's fund capital. Equity share are the most important source of raising long term capital. The equity share are those share which do not carry any special or preferential rights in the payment of annual dividend or repayment of capital. At the time of winding up also capital of equity shareholders is return only after the claim has been settled. Prior to the year 2000, the companies were allowed to issue equity shares with equal rights only. In the year 2000, an amendment was made in Companies Act permitting companies to issue two categories of equity shares:

1. Equity shares with equal rights

2. Equity shares with differential rights as to dividend

2. Preference shares : Preference shares are those share which are given preference over equity shares in respect to payment of dividend and repayment of investment amount during winding up. 

3. Retained profits : Retained earning are also know as ploughing back of profit, retained earning, self-financing or internal financing, reserves or surplus. 

Retained earning refers to undistributed profits after payment of dividend and taxes. It provides the basis of expansion and growth of companies. It is considered as the most important source of finance; since it is internally generated, this method of financing is known as self-financing.

4. Global Depository Receipt : Global Depository Receipt are issued against the issue of equity share in the global market. These are indirect equity offerings. The equity share issued against GDR are held by an internal bank called Depository. Companies issue dividend notices, reports etc. regarding these shares to a bank only. These shares are called depository shares. The holders of these shares do not get voting rights. The capital contribution by these shares is in dollars. That is why these are called dollar-dominated instruments. The GDR was introduced by the Citibank in 1990.

American Depository Receipt : An ADR is just like GDR expect that it can be issued to a citizen of USA only and it can be listed in the US stock exchange. Shares issued by the company are held by an international bank called depository, which receives dividend notices and reports. ADRs are subject to much stricter disclosure requirement than GDRs because regulations of US stock exchange are very strict. Annual legal and accounting cost of maintaining an ADR are much higher than GDR. 

An ADR is an American dollar- denominated instrument. Any American bank functioning as a depository can issue ADR. 

Indian Depository Receipt : An IDR is also like GDR except that it issued to citizen of India. Through IDR , foreign companies raise fund from Indian market.

The foreign company IDRs will depository. The depository issues receipts to investors in India against these shares. Standard Chartered bank was the first global company to file fir an issue of IDR in India. 

BORROWED FUND

1. Trade Credit : Trade credit refer to an arrangement whereby a manufacturer is granted credit from the supplier of raw material, inputs, spare parts etc. The suppliers allow their customers to pay their outstanding balance within a credit period. Generally the duration of trade credit is three to six months and thus it is a short-term financing facility. The availability of trade credit depends upon: nature of the firm, size of the firm, status of the firm. 

2. Public Deposits : Public deposits refers to unsecured deposits invited from the public. A company wishing to invite public deposits places an advertisement in newspapers. Any member of the public can fill up the prescribed form and deposit money with company. 

3. Debentures : Debentures includes debenture stock , bond or any other instrument of a company evidence a debt, whether constituting a charge on the assets of the company or not. Debenture are common securities issued under borrowed fund capital. Debenture are instrument for raising long term debt capital. Debenture are called creditorship securities because debenture holder are called creditors of the company. 

4. Commercial Banks : Commercial banks a very important position a they provide funds for different purpose and different periods. Firms of all size can approach commercial bank provides short-term and medium term loans but nowadays they have started giving long term loans against security. 

5. Loan from financial institutions : Public financial institutions are referred to as lending institutions, development banks or financial institutions. After Independence, government of India realised that for economic development of a country only commercial banks are not sufficient. There must be financial institutions to provide financial assistance and guidance to industries and business enterprises. The need for public financial institutions was felt due to the following reasons.

6. Inter- corporate Deposits : It is the deposits made by one company with another company. The option of using finance is available to all public companies whether having share capital or not. It includes:  

1. When a company acquire security of another company.
2. When a company gives loan to another company.
3. When a company gives guarantee to any person or institution who provides loan to another company. In general , we can say when companies arrange funds from another company it is known as Inter-corporate Deposits. 

Now you should know that no source of finance is free from limitations. So we cannot say which is the best source of finance. Before selecting the source of finance to meet the financial requirements, the businessman must keep in mind the few following factors:- 

1. Cost involved in procurement of finance.

2. Financial capacity of the firm.

3. Form of business organisation.

4. Duration for which the firm require finance.

5. Risk involved.

6. Flexibility of the company.

7.Claim over the assets.

8.Tax benefits