Following are some long-term & short-term
sources of financing for a business:
Shares: It is the most important source for raising
permanent or long-term capital. Section 86 of Companies Act,
1956 provides that share capital of a company formed after
April 1, 1956 or the share capital issued after that date,
shall be of only two kinds, viz. Preference share capital
and equity share capital.
Preference shares: According to Section 85 of The
Companies Act, 1956, a preference share is one, which fulfills
the following conditions:
- A preference share has a preferential right to dividend
to be paid either as a fixed amount or an amount calculated
by a fixed rate which may be either free of or subject to
- A preference share has the right to the repayment of capital
before any thing is paid to equity shareholders on the winding
up of the company.
Equity Shares: According to Section 85 of The Companies
Act, 1956, an equity share is a share which is not a preference
Equity shares entitle to whole of the profits earned by the
company, after a fixed dividend on preference shares that
has been paid by it, are equity shares. Equity shares have
no right to either a fixed dividend or repayment of a pre-determined
amount of capital in the event of winding of the company.
Debentures: When a company desires to borrow a considerable
sum of money for its expansion, it invites the general public
to subscribe to its debentures. A debenture is a certificate
issued by the company acknowledging the debt due by it to
its holders and is issued by means of a prospectus in the
same manner as shares. The following are the various types
of debentures issued by a company: Simple or naked Debentures,
Secured and Mortgage Debentures, Redeemable Debentures, Perpetual
or Irredeemable Debentures, Convertible Debentures, Non-Convertible
Public Deposits: Public deposits are the fixed deposits
accepted by a business enterprise directly from the public.
This source of raising short-term & medium finance was
very popular in absence of banking facilities. Public deposits
have several advantages such as simple & convenient source
of finance taxation benefits, trading on equity, no need of
securities and an inexpensive source of finance.
Ploughing back of profits: It means reinvestment by
concern of its surplus earnings in the business. It is an
internal source of finance & is suitable for an established
firm for its expansion, replacement, etc.
Loans from Financial Institutions: Several financial
institutions like LIC, State Finance Corporation, Industrial
Development bank, etc. also provide loans. This source is
more suitable for medium term demands of working capital.
Interest is charged at fixed rate on these loans.
Trade Credit: It is the credit extended by the suppliers
of goods in the normal course of business. It is an important
source of short-term finance. The credit-worthiness of the
firm and the confidence of its suppliers are the main basis
of securing trade-credit.
Advance payment: Some business houses get advances
from their customers and agents. It is a cheap source of finance.
Installment Credit: In this method assets are purchased
and the possession of goods is taken immediately but the payment
is made in installments. Generally, interest is charged on
the unpaid amount.
Commercial Paper: It represents unsecured promissory
notes issued by firms to raise short-term funds. In India
only large companies enjoy high credit rating & can issue
commercial paper to raise short-term funds.
Deferred Income: These are incomes received in advance
before supplying goods or providing services.