ACKNOWLEDGEMENT

I would like to convey my thanks to Mrs. Madhuri my Business Studies teacher for immense help and guidance in completion of my project . This report is submitted as part of internal assessment included in curriculum for Class XI examinations to be held for the year 2010-2011. PRASHANT KUMAR

SOURCES OF BUSINESS FINANCE

Sources of business finance provides an overview of the various sources from where funds can be procured for starting as also for running a business. It also discusses the advantages and limitations of various sources and points out the factors that determine the choice of a suitable source of business finance. It is important for any person who wants to start a business to know about the different sources from where money can be raised. The financial needs of a business can be categorized as follows: Fixed capital requirements: In order to start business, funds are required to purchase fixed assets like land and machinery, and furniture and fixtures. This is known as fixed capital requirements of the enterprise. Working capital requirements: No matter how small or large a business is, it needs funds for its day-to-day operations. This is known as working capital of an enterprise, which is used for holding current assets such as stock of material, bills receivables and for meeting current expenses like salaries, wages, taxes, and rent. Source of Funds Classification 1. On the basis of period 1.1. Long-term Equity shares Retained earnings Preference shares Debentures Loan from financial Institutions Loan from banks

1.2. Medium-term Loan from banks Public deposits Loan from financial institutions Lease financing 1.3. Short-term Trade credit Factoring Banks Commercial paper 2. On the basis of ownership 2.1. Owners Funds Equity shares Retained earnings 2.2. Borrowed Funds Debentures Loans from banks Loans from financial institutions Public deposits Lease financing Commercial Papers 3. On the basis of source of generation\ 3.1. Internal Sources Equity share capital Retained earnings 3.2. External Sources Financial institutions Loans from banks Preference shares Public deposits Debenture Lease financing Commercial Papers Trade credit Factoring

SOURCES OF FINANCE

1. Retained earnings Merits

Retained earnings is a permanent source of funds available to an organization. It does not involve any explicit cost in the form of interest, dividend or floatation cost. As the funds are generated internally, there is a greater degree of operational freedom and flexibility.

Limitations
Excessive ploughing back may cause dissatisfaction amongst the shareholders as they would get lower dividends. It is an uncertain source of funds as the profits of business are fluctuating. The opportunity cost associated with these funds is not recognized by many firms. This may lead to sub-optimal use of the funds.

2. Trade credit Merits

Trade credit is a convenient and continuous source of funds.