What are the Sources of Business Finance?

A business can be financed form different sources. There are many sources of business finance. Let’s know about what are the various sources of business finance:

The assets of a company indicate the uses of fund while the liabilities of a company indicate the sources of fund. There are two sources of fund:

Sources of business finance

(A) Internal sources of fund:

The fund that is collected from the owners or internal revenue or cash flow of firm, is called internal sources of business finance or internal financing.

For example, share capital, retained earnings, depreciation fund, etc. The following are the sources of internal financing:

Sources of business finance

Sources of business finance

  1. Promoters’ initial capital: The first and the foremost source of fund is promoters’ initial capital. At the initiation of business, promoters accumulate capital. But the amount of capital, change of capital, accounting system etc. are different according to the nature of business. 
  2. Retained earnings: The portion of net profit which is not distributed among the owners, instead is retained, is called retained earnings. Retained earnings are an important source of internal financing of a form. Retained earnings may be of five types:
    • General reserve: The portion of net profit that is kept reserved instead of seeing distributed to owners with the objective to owners with the objective of meeting future uncertainties is called general serve.
    • Dividend equalization fund: Most of the shareholder expects a consistent return every year. But a firm does not earn consistent return every year. To provide consistent return, every firm retains some portion of profit each year. This is called dividend equalization fund. This is another important source of fund.
    • Credit balance of profit and loss account: The remaining balance of net profit after deducting dividend and general reserve is used as a source of internal financing.
    • Singing fund: When a form takes long-term loan, it retains some portion of profit as collateral. This fund is called sinking fund and is used as a source of internal financing.
    • Workmen’s Compensation and Welfare Fund: This fund is formed to compensate any injured or diseased employee. This fund can temporarily be used as a short-term fund.
  3. Provision for depreciation: Every firm maintains some provisions for depreciation assets every year. This depreciation can be used as a source of internal fund.
  4. Outstanding expenses: Every firm carries some outstanding expenses in its account every year. This fund can be used as a source of internal financing until and unless it is paid.
  5. Provident fund of officers and employees: Almost all of the firms have provision of provident fund for its officers and employees. This fund can be used as a source of internal financing.
  6. Sale of fixed assets: Sometimes fund can be collected by selling fixed asset when the assets become obsolete.
  7. Over use of fixed assets Every asset has an estimated life. But after the estimated period, the asset can be used for some additional years. The accumulated depreciation for the asset can be used as a source of internal financing.

(B) External sources of fund:

The fund that is collected from any source outside the firm is called external sources of business finance or external financing.

Sources of External Financing:

There are two types of external financing sources:

Institutional Sources

Non-institutional Sources

Commercial Banks

Trade Credit

Investment Banks

Outstanding Expenses

Insurance Companies

Mortgage

Development Banks

Bond and Debenture

Leasing companies

Friends and Rel

atives

Capital Market

Money Lenders

Specialized Financial Institutions

1. Institutional Sources:

  1. Commercial Banks: There are more than 50 commercial banks in our country. These banks can be used as institutional sources of fund. Banks provide both secured and unsecured loans to borrowers.
  2. Investment Banks: The main function of investment bank is to underwrite the newly issued share of public limited companies and provide bridge financing to them. Investment Corporation of Bangladesh (ICB) acts as an investment bank in Bangladesh.
  3. Insurance Companies: Insurance companies gather of lot of idle cash for a long time. These idle cash can be used as institutional sources of fund. There are more than 30 general insurance companies and more than 30 life insurance companies in Bangladesh.
  4. Development Financing Institutions: To promote industrialization, some institutions act as sources of fund. These are Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS).
  5. Leasing company: Leasing companies play important role in mid-term financing. Industrial Development Leasing Company (IDLC) and United Leasing Company (ULC) play a vital role in this regard. Besides there are more than 30 leasing companies to provide fund.
  6. Owner’s Capital from Capital Market: One of the external sources of fund is owner’s capital. This capital can be collected from initial public offering (IPO) or seasoned public offering (SPO).
  7. Specialized Financial Institutions: Specialized financial institutions provide loan for special purposes. These institutions include Bangladesh House Building Finance Corporation (BHBFC), Bangladesh Krishi Bank (BKB).

2. Non-institutional Sources:

  1. Trade Credit: Trade credit refers to the credit that a customer gets form suppliers of goods in the normal course of business. It is an interim debt arising from credit sales and recorded as an account receivable by the seller and as an account payable by the buyers.
  2. Outstanding Expenses: Some expenses like telephone bill, electricity bill, etc. aren’t paid on a cash basis. These outstanding expenses act as non-institutional sources of fund.
  3. Mortgage: Business firms can take loan by putting mortgage against the loan. This mortgage is a non-institutional source of fund.
  4. Bond and Debenture: Large and blue chip companies can raise fund by selling bond to general investors. The difference between share and bond or debenture is that investors earn fixed income against bond and debentures.
  5. Friends and Relatives: Generally sole proprietorship and partnership businesses raise fund form friends and relatives.
  6. Money Lenders: Money lenders are another non-institutions’ source of fund; generally sole proprietorship and partnership businesses raise fund from this source.

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