Classification of Sources of Funds

Finance is simply considered as life blood of a business. Business simply cannot function without money, and the money required to make a business function is known as business funds.

A business can run smoothly only if it has sufficient funds in the absence of which it cannot function properly.

There are various sources of finance which are available for businesses but deciding the correct source of finance is one of the most difficult task for both starting as well as an established business.

 

CLASSIFICATION OF VARIOUS SOURCES OF FINANCE

The various sources of finance are classified as follows –

  1. ON THE BASIS OF PERIOD :
  • Long Term Sources :- These are the sources which fulfill the financial requirements of a business for a period more than 5 years.

Examples of these sources include public deposits, bank loans etc.

  • Medium Term Sources :- These sources fulfill the finance requirements for a period of 1 year to 5 years. Examples include – lease financing, borrowings from commercial banks etc.
  • Short Term Sources :- Funds which are required for a period not exceeding one year are called short-term sources.  Examples include Trade credit, commercial paper etc.

 

  1. ON THE BASIS OF OWNERSHIP :
  • Owner’s Funds :- Owner’s funds mean funds which are procured by the owners of a business, which may be a sole entrepreneur or partners or shareholders of a business. The capital remains invested in the business for a longer period of time.

         Examples include Equity shares and retained earnings.

 

  • Borrowed Funds :- These are the funds accumulated with the help of borrowings or loans for a particular period of time & is one of the most commonly used source of funds. Example include , Loans from Commercial banks, Public deposits, issue of Debentures etc.

 

  1. ON THE BASIS OF GENERATION :
  • Internal Sources :- Internal sources of finance are those funds that are within an organization and fulfill basically the short and limited needs of a business. For example – Retained Earnings.
  • External Sources :- The funds which are arranged from outside the business are known as external sources of finance. This source is commonly used when large amount of funds are required. Examples include , Issue of Equity Shares , Debentures etc.

Thus, all businesses rely on various sources of finance to fulfill their various requirements . So every organization should consider all the aspects regarding different sources of funds before deciding the source from which they want to raise finance.

Accounting & Finance for Banking

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