Sources of Finance simply means to Know from where the funds are coming. This Blog-post is the Other part of Our Previous Blog Post about Financial Management. These are majorly divided into two parts – Short term Sources and Long-Term Sources.
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So, Let’s discuss first Short Term Sources of Finance.
Short Term Sources Of Finance-
Short-term Sources of finance are those finance which includes less amount of money but that money required for day to day operations. It includes Purchasing of raw material, stationary expenses etc.
There are Various Short-term Sources which are as follows:
- Indigenous Bankers- Indigenous Banks is the type of Private Lenders which provide Finance at a very High-Interest rate.
- Trade Credit- It refers to the extended rate by the Suppliers. In this, there is a due Date by which Customers/Buyer has to give back the Money. If Customer delays the payment period, then they have to give the Extra Amount which generates the Short- term Sources of Finance for the Supplier.
- Instalment Credit- In Installment Credit, we purchase the assets and we also get the possession but we do the payment in the form of Installments.
- Advances- Advances means to give money in advance. It applies where We want Tailor-made Products. That’s why we have to give money in advance.
- Factoring Agency- It is the finance provided by Commercial Banks and Factors. In this, Commercial Bank may provide Finance by discounting their bills. By this, firms have got full payment for the goods which they sold on cash.
- Accrued Expenses– These are those expenses which have been incurred but not yet paid. For Example– Outstanding Rent.
- Deferred Income- In this, the Income Received in Advance but goods and Services paid later. For Example- School or College fees.
- Commercial Paper- It is like Promissory Notes which company gives to raise their short-term loans. In India, only large Firms have right to issue these Commercial Papers.
- Public Deposits- It includes Acceptance of Fixed Deposit from Public by all type of firms.
Now, Come to the Long-Term Sources of Finance.
Long-Term Sources of Finance-
Long Term Source of Finance is those finance which constitutes a major part of Finance.
Those are as follows-
Equity Shares are the owners of the Firm. These are those shares who get the dividend after giving the dividend to the Preference Shareholders. These Shareholders don’t get fix amount of Dividend.
Features of Equity Shares-
- Claim on Assets
- Claim on Income
- Preemptive right.
- Voting Rights
These are those shareholders who get preference in getting Dividend before giving to Equity Shareholders. These shareholders have a hybrid Form of security because they get both the Benefits of Debentures and Equity Shareholders Because they get the fixed rate of Dividend. Here, the fixed rate gives to the Debentures and Dividend gives to the Shareholders.
Types of Preference Shares-
- Cumulative and Non-Cumulative Preference Shares– If Firm in a particular year doesn’t earn profit and not give the dividend to the shareholders. Then, the Cumulative Preference Shareholders can accumulate the dividend of the previous year with the current year. But Non-Cumulative Preference Shareholders can’t do the same.
- Redeemable and Irredeemable Preference Shares– Redeemable Preference Shareholders are those whose money is paid back to them after a particular period of time. But In Irredeemable Preference Shares, it doesn’t happen the same.
- Participating and Non-Participating Preference Shares- After distributing the dividend to the Equity Shareholders. If some profit left, then the Participating Preference Shareholders can participate in that profit. But in Non-Participating, they can’t participate in the extra profit.
- Convertible and Non-Convertible Preference Shares– Converting Preference Shares are those shares which can be converted into Equity Shareholders after a fixed period of time. But in Non-Convertible Preference Shares, they can’t convert into equity shares.
It is an Acknowledgement of debt. It is a document under common seal which provides for the payment for the principal amount plus interest thereon.
Types of Debentures-
- Secured and Unsecured Debentures- Secured Debentures are those debentures which have a rightful claim on assets if the firm doesn’t pay back their money. But Unsecured Debentures have no such right.
- Bearer and Registered Debentures-Bearer Debentures are those debentures which are transferable and not registered. But Registered Debentures are those debentures which involve a long process to be registered and these are not transferable.
- Redeemable and Irredeemable Debentures- Redeemable Debentures are those debentures which are for a short span of time and firm redeems those debentures by giving the full principal amount. Irredeemable Debentures are those debentures which are not redeemed after a short period of time.
- Fully Convertible, Partly Convertible and Nonconvertible Debentures- Fully Convertible Debentures are those debentures which are fully converted into equity shares. Partly Convertible Debentures are those Debentures whose some part or which are partly equity shares. Non-Convertible Debentures are those debentures which aren’t converted into equity shares.
And This is all about the Sources of Finance.
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