Sources of Finance

Every business firm requires capital to carry on its operations.

Capital refers to investment made in a business for earning profits.

The amount of capital requirement differs from business to business depending upon the size of the business, the nature of the business, the basis of the period, and types of ownership.

We shall study the Finance/capital requirements of the following three forms of organizations:

1. Sources of finance for a Sole Proprietors Business

2. Sources of finance for a Partnership Business

3. Sources of finance for a Joint-stock company

Sources of Finance

1. Sources of Finance for a Sole Proprietors Business:

A sole proprietorship refers to a form of business organization that is owned, managed, and controlled by an individual who receives all profits and bearer of all risks, and is responsible for all business operations.

Funds for a Sole proprietorship are available from the following sources:

1. Capital provided by sole trader(owner)

2. Borrow funds from friends

3. Borrow funds from relatives

4. Borrow funds from Family members

5. Loan from Commercial Banks

6. Loan from Financial Institutions

7. Trade credit from creditors

8. Investment of part of the profit earned

9. Advances from customers

Sources of Finance

2.Sources of Finance for a Partnership Business:

Partnership is a voluntary association of two or more persons who agree to carry on a lawful business jointly and share its profit and losses according to the agreement amongst them. They combine their capital funds and skills to carried on business by all the partners or any one of the partner acting on behalf of all the other partners  together.

Funds for Partnership firms are available from the following sources:

1. Capital Invested by partner(owner)

2. Loans from partner

3. Borrow funds from friends

4. Borrow funds from relatives

5. Borrow funds from Family members

6. Loan from Commercial Banks

7. Loan from Financial Institutions

8. Trade credit from creditors

9. Investment of part of the profit earned

10. Advances from customers

Also Read: Business Environment

Sources of Finance

3. Sources of finance for a Joint-stock company:

Section 2(20) of Companies Act, 2013 states that a company means any association of person registered (Incorporated) under the present or the previous Companies Act.

According to Prof. L.H. Haney, “Company is an artificial person created by law having separated legal entity with a perpetual succession and common seal”.

According to Justice James, “A company is an association of persons united for a common object.

Funds for a Joint-stock company are available from the following sources:

A.Owned Funds

1. Share capital ( Equity share capital, Preference share capital)
2. Retained Earnings

A.Borrowed  Funds

1. Debentures

2. Loan from Commercial Banks

3. Loan from Financial Institutions

4. Public Deposits

5. Trade credit

6. Customer Advances

7. Inter-corporate deposit

8. Instalment credit

9. Factoring

Sources of Finance

Also Read: Management and Its Characteristics