What are the Sources of Business Finance?

A business can be financed from 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 funds while the liabilities of a company indicate the sources of funds. 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 the 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

Promoters’ initial capital: The first and foremost source of funds 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. 

Retained earnings: The portion of the 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 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 returns every year. To provide consistent returns, every firm retains some portion of profit each year. This is called dividend equalization fund. This is another important source of funds.
    • The credit balance of profit and loss account: The remaining balance of net profit after deducting dividends and the general reserve is used as a source of internal financing.
    • Sinking fund: When a form takes a long-term loan, it retains some portion of the profit as collateral. This fund is called a sinking fund and is used as a source of internal financing.
    • Workmen’s Compensation and Welfare Fund: This fund is formed to compensate for any injured or deceased employee. This fund can temporarily be used as a short-term fund.

Provision for depreciation: Every firm maintains some provisions for depreciation assets every year. This depreciation can be used as a source of internal funds.

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.

Provident fund of officers and employees: Almost all of the firms have the provision of provident fund for its officers and employees. This fund can be used as a source of internal financing.

Sale of fixed assets: Sometimes funds can be collected by selling fixed assets when the assets become obsolete.

Overuse 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. There are two types of external financing sources. Sources of External Financing are:

  1. Institutional Sources:
  2. Non-institutional Sources:

1. Institutional Sources:

Commercial Banks: There are more than 50 commercial banks in our country. These banks can be used as institutional sources of funds. Banks provide both secured and unsecured loans to borrowers.

Investment Banks: The main function of an 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.

Insurance Companies: Insurance companies gather a lot of idle cash for a long time. These idle cash can be used as institutional sources of funds. There are more than 30 general insurance companies and more than 30 life insurance companies in Bangladesh.

Development Financing Institutions: To promote industrialization, some institutions act as sources of funds. These are Bangladesh Shilpa Bank (BSB) and Bangladesh Shilpa Rin Sangstha (BSRS).

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 funds.

Owner’s Capital from Capital Market: One of the external sources of funds is the owner’s capital. This capital can be collected from the initial public offering (IPO) or seasoned public offering (SPO).

Specialized Financial Institutions: Specialized financial institutions provide loans for special purposes. These institutions include the Bangladesh House Building Finance Corporation (BHBFC), Bangladesh Krishi Bank (BKB).

2. Non-institutional Sources:

Trade Credit: Trade credit refers to the credit that a customer gets from 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.

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 funds.

Mortgage: Business firms can take a loan by putting a mortgage against the loan. This mortgage is a non-institutional source of funds.

Bond and Debenture: Large and blue-chip companies can raise funds by selling bonds to general investors. The difference between share and bond or debenture is that investors earn fixed income against bonds and debentures.

Friends and Relatives: Generally sole proprietorship and partnership businesses raise funds to form friends and relatives.

Money Lenders: Moneylenders are another non-institutions’ source of the fund; generally sole proprietorship and partnership businesses raise funds from this source.

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