Sources of business finance (corporate finance) tell about the different ways to raise funds to run the business and the sources can be of many types like a loan from banks, venture capital, these sources of funds are used in different situations.
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What is business finance?
Investment in the business in the form of capital funds and credit funds is known as business finance. It defined as, planning, managing, and controlling the money used in connection with the business.
An adequate amount of funds helps business enterprises to run the activities and also helpful to meet their liabilities on time.
Definition of finance:
“Finance is that business activity which is concerned with the acquisition and conservation of capital fund in meeting the financial needs and overall objectives of business enterprise.”
“Busines finance involves a set of administrative functions in an organization which relates with the arrangement of cash and credit so that the organization may have the means to carry out its objectives as satisfactorily as possible.”
-Howard and Upton
Sources of finance :
There are two main sources of business finance which are explained as follows:
1. Owner’s Fund:
The fund invested by the owner as well as an accumulated profit of the business is known as the owner’s fund. For example equity share, retained earnings. There is no liability on the side of the business to repay this amount to the owner.
a) The capital contributed by the owner remains permanently invested in the business and not refundable like a bank loan.
b) The return on the owner’s capital differs from the earning of profit of the business, that’s why it is known as risk capital.
2. Borrowed Fund:
Any loan or credit taken by the business unit from other financial institutions is called a borrowed fund. Business firms can take this type of fund for a fixed period of time. It can be of short-term loan, medium-term, and can be a long-term loan.
There are various sources of borrowing funds which are as follows:
- Trade credit
- Public deposits
- The loan from commercial banks
- The loan from other financial institutions.
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