Types And Basic Sources Of Finance Essay

Finance: It is art and science of management of money. It influences everything that individual or firm does because it is concerned with individual at personal level and with firm at business level. It is all about lending, borrowing, investing, forecasting and saving. It is mostly manage by government and large companies. It is all about managing money and actually acquiring fund. It is study of all financial system like assets, liabilities, investments and credit. Finance is further divided into three types:

  • Personal finance
  • Corporate finance
  • Public finance.

Personal finance: Personal finance is all about management of money through saving and investment. It is concerned with individual and households. It include all departments those provide help to individual and households on financial decision and investment opportunities. It includes purchasing of financial products. It is much dependent on expenses and income of individual. To become financial literate income and savings are most important factors. Examples: It examples includes budgeting, retirement planning, investment decision and tax planning. It is all about whether to invest or to save. Example also includes balancing checkbooks and obtaining fund for purchases.

Corporate finance: It is defined as departments in corporations that are helpful in making financial and investment decision for that corporation. These departments also provide assistance in implementation of long term and short term planning and various strategies. Decision about financing projects are also included in it. Investment banks are also important source for help. Examples: It example include the decision about raising capital through which source whether to issue bond or to offer stock. It is because corporate finance is responsible for maximizing value of shareholder. It also includes fixed and current asset for investment in form of cash, receivables, inventory, building, land and real estate.

Public finance: Public finance involves government. It is all about government revenue and government expenditure. Public authorities are also involve in adjustment of desirable effect and avoiding undesirable one. It is helpful in stability of economy Example: Taxes are major example of this type of finance. Government bodies are also socially responsible for day-to-day operation. Budgeting, debt issuance is also involves in public financing. In public financing, government pay for services provided to public.

Basic sources of finance:

There are two sources of finance

  • Internal finance
  • External finance.

Internal finance

It is that source of finance that is generated within organization. Existing asset are helpful in generation of this type of finance. It have cost is low. There is no need for collateral security. Amount raised from this source is low. It includes:

  • Owner’s investment
  • Retained profit
  • Sale of stock
  • Sale of fixed asset
  • Debt collection.

These all based on ownership and generation.

Owner’s investment: This money is personal saving. Starting capital is good example of this type. It falls under long-term source of finance. Owner investment is recorded through bank transfer option and this is accurate source.

Retained profit: When business is working for more than one year this source is used. In this earned profit is invested back in business. It is medium and long-term finance.in this type no interest is paid.

Sale of stock: Unsold stock sold is helpful in generating finance. This falls under short-term source of finance. It is quick and easy way of raising finance.

Sale of fixed assets: It is selling those parts of fixed assets, which are not in use and play their role in generation of fund. This is just that part which is allowed to sell. Organizations have some limits for fixed assets to be sold. It falls under medium term source of finance. It is disposing off assets.

Debt collection: Finance can be raised by collecting debts. Debtors owes business money. Business dealing in cash have debtors. It falls under short-term finance. It is normal business operations. Mostly companies work as agents for debt collection and are known as collection agencies. Next is external source of finance.

External sources

Sources of finance those are helpful in raising fund from outside the organization. It is high in cost. Collateral security is sometimes needed. It is helpful in raising huge amount of fund. This source of finance is according to generation. It includes debt financing and equity financing. Debts financing is making fixed payment to lenders. Ownership is not given to shareholder. There is strict rules and regulation for repay of principal and interest amount. Equity financing is the major source of finance for most of the companies who indicate the share in the ownership of the firm and the interest of the shareholders. The firms raise capital by selling its shares to the investors. With every new issuance previous stockholders’ percentage of ownership decreases. It includes:

  • Bank loan or overdrafts
  • Additional partner
  • Mortgage
  • Trade credit
  • Share issue
  • Government grants
  • Hire purchase
  • Leasing.

Bank loans and overdrafts: This is amount borrowed by some financial institutes, which is repaid after agreed time period with some interest rate. It is short and medium-term source of finance.it is helpful in good financing. Overdrafts are permission of overdrawn on business own account. It is short-term source. It is cheaper than bank loans.

Additional partner: Partnership businesses mostly use this type to raise fund. New partner will add some capital additional to the original amount.it is not repayable and no interest is paid on this capital.

Mortgage: It is acquired on property and property is owned by organization after payment has been made. It falls under long-term. When business own property it is used under business need but it is expensive.

Trade credit: Trade credit is basically selling first and paying later. It indicates good cash flow. It is short -term source. It is providing customer with some discount if payment is made within agreed period.

Share issue: Shares are issued to raise fund by limited company. Dividend is paid to shareholders through profit earned. It is long-term source.

Government grants: It is provided by government organization for both established and newly started business. It is issued to only some organizations because it include location factor in it.

Leasing: It is a type of rent in which business need not to pay large amount to get asset. It is expensive and asset belongs to finance company. Medium-term is source of leasing.

Hire purchase: In hire purchase initial amount is paid and after that payment is made in form of installment in set of period of time. In hire purchase after all payments are made company own asset but in leasing asset is not owned. It is medium-term source.

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