The Sources Of Finance Available To An Organization

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Sources of Finance

Finance is essential for a business’s operation, development and expansion. Finance is the core limiting factor for most businesses and therefore it is crucial for businesses to manage their financial resources properly. Finance is available to a business from a variety of sources both internal and external.

Internal sources of finance

Funds which are available within the organisation and consist of:

Personal savings

Business borrows personal money of a shareholder, partner or owner for a business’s financial needs. This source of finance is known as personal savings.

Retained profits

Undistributed profits of a company, as not all the profits made by a company are distributed as dividends to its shareholders.

Working capital

Working capital is the difference of current assets and current liabilities. Working capital helps any business to fulfil its financing for its short term requirements.

Sale of fixed assets

Fixed assets can be sold to raise finance in demanding times for the business. Otherwise businesses may choose to stop offering certain products and sell its fixed assets to raise finance. Selling fixed assets reduces the production capacity of a business affecting a business’s return.

External sources of finance

External sources of finance are from sources that are outside the business. External sources of finance can either be:

Ownership capital

Ownership capital is the money invested in the business by the owners themselves. It can be the capital funding by owners and partners or it can also be share bought by the shareholders of a company. There are mainly two main types of shares. Ordinary shares Preference shares

Ordinary shares

Known as a unit of investment in a company, have the privilege of receiving a part of company profits via dividends according to the value of shares held and yearly profit of the company.

Preference shares

Preference shareholders receive a fixed rate of dividends before the ordinary shareholders are paid. There are several types of preference shares and company can issue to raise the required capital, provided it is permitted by the By Laws of the company.

Non-ownership capital

Unlike ownership capital, non-ownership capital does not allow the lender to participate in profit-sharing or to influence how the business is run. Different types of non-ownership capital: Debentures Bank overdraft Loan Hire-purchase Lease Grant Venture capital

Debentures

Debenture holders are not owners but long-term creditors of the company who receive a fixed rate of interest annually whether the company makes a profit or loss.Debentures can be secured, unsecured, fixed or floating.

Bank overdraft

A short term credit facility provided by banks for its current account holders allowing businesses to withdraw more money than their bank account balances hold. Bank overdraft is the ideal source of finance for short-term cashflow problems.

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