Business finance refers to the money or fund needed to perform various organisational operations like the purchase of raw material, goods, assets, etc.
Tangible assets like machinery, buildings, furniture, factories, as well as intangible assets like trademarks, patents, technical expertise, etc. are part of essential business operations. Business finance refers to the money which is required for purchase and maintenance of these assets along with other overhead expenses.
Now, to accumulate these finances, businesses rely on multiple sources so that they have ample amounts of funds throughout. To start a business and sustain it in the long run, entrepreneurs need various sources of finance.
For example, a business named ABC enterprises has arranged for the initial capital investment amount with their savings. They have procured office, equipment, and raw material to start the production work.
A few days later, they need more funds to pay wages regularly and to maintain the stocks of raw materials. To meet such day to day operational demands, businesses will require funds and they can’t depend upon savings solely.
They need various Sources of Business Finance to accumulate funds at any point in time and keep the organisation running. However, there can be different sources of finance depending upon the nature of ownership, equipment, and sources.
The funds needed for buying current assets are
Working capital requirement.
Fixed capital requirement.
Ploughing back of profits.
Answer : (b) Working capital requirement.
What are internal sources of capital?
Generated through issue of shares.
Generated through outsiders such as suppliers.
Generated within the business.
Generated through loans from commercial banks.
Answer : (c) Generated within the business.
There are several categories in which these sources of businesses finance can be classified. Have a look and get a brief idea about the same.
Based on Ownership
Amongst the other Sources of Finance in Financial Management, this source is divided into two categories.
Based on generation
This source of financing business is categorised into two kinds
Based on the period
Depending upon the term or period of these funds, these are divided into three categories. These are mentioned below.
Medium-term source of finance is usually accumulated for what period?
Answer : More than 1 year and less than 5 years.
Examples of Business Finance Source
Like the structure of different sources of finance, the examples of such sources also follow the same structure. These fall under different categories depending upon time, the basis of ownership, or basis of source generation.
Here are some examples of varied sources using which businesses can accumulate funds and utilise this money for various operations.
Preference capital or preference share
Receivables and payables
Short term loans
Term loans from financial institutions
Advances from various customers
Short term deposits
Asset securitisation, etc.
These are a few examples of varied sources of businesses finance using which businesses arrange for funds. It is crucial to rely upon a single source as unavailability of funds through it can put your businesses operations into hold.
Therefore, entrepreneurs are introduced with several sources so that they can make use of them as per their business demand. For instance, one may need limited funds to keep their inventories stocked up for a year and acquiring short term funds will help businesses get the same.
Subsequently, entrepreneurs need to realise their business viability and demand for funds before deciding upon which sources of businesses finance they need.
To learn more about sources of business finance, go through the study materials available in our website today. You can also install Vedantu’s app to participate in live classes and keep yourself updated.
1. What is Business Finance?
It is the method wherein entrepreneurs have to finance their business using money accumulated from outside or inside. They accumulate funds and use these to carry various day to day business operations.
2. What are the Sources of Finance?
There can be several sources of finance depending upon ownership of funds, generation of funds, and period. These structures are again divided into subcategories. Generation of funds is divided into internal and external sources. Based on ownership, these are classified as owned and borrowed. And based on time, these are classified as short term, medium-term, and long term.