Business finance refers to the funds required to establish, operate business activities, and expand in the future. Funds are required in various purchases like furniture, machinery, buildings, offices, factories, or other things. Apart from the purchase funds are required in carrying out day to day activity in any business. It is essential to have a sufficient amount of money to survive and grow the business.
A businessman or an entrepreneur needs to know the sources of business finance when starting a business or a new venture. Some of the sources of business finance are categorized based on ownership, time, period and control, etc. These sources are evaluate and used in different situations. Let’s understand the classification of sources of funds or business finance-
Classification of sources of business finance
Any business can raise its capital through various sources of business finance which are basically classified into:
1. Classification based on the period.
The funds under this category are specified on the basis of the time period, further, they are classified under 3 subcategories:
· Short term source of finance – These funds are just required for a year. An example of such loans is working capital loans from commercial banks.
· Medium term source of finance – These are short term funds that last more than one year but are less than five years. An example of such loans is borrowing from a public deposit.
· Long term source of finance – These funds are utilized for more than 5 years and are arranged through preference and debentures.
2. Classification based on ownership.
They are further classified into 2 categories:
· Borrowed funds- It refers to the borrowings of a business firm. These are non-deposit borrowings that support lending or investing. The examples are loans from financial institutions.
· Owners Funds- It refers to the funds invested by the company owners for its development. Examples are equity and preference share capitals and retained earnings.
3. Classification based on generation.
This source of fund is further divided into two divisions:
· Internal sources- These funds are those that the owners generate within the organization. An example of such a fund is selling off assets.
· External sources – These are such funds that are arranged from outside the business for example issuance of equity shares to the public.
The above was the classification of sources of business finance that every entrepreneur needs to know about before starting of a business as funds plays important role in running a successful business.