Financial Systems

Task1

1.1 And 1.2 Sources of finance available to a business

Sources of finance basically mean the various available resources from which a firm can borrow or generate capital to invest in the business. These sources of finance are helpful in different situations. To start a business, capital is required as without capital it is not possible to start a business or run a business. As there are various types of finance that Stephani can choose from, it is a complex challenge for her to choose the right source of finance. To analyze and compare the source of finance, Stephani is required to understand all characteristics of the financing sources.

These are classified into:

              1. Time period

              2. Ownership and capital

              3. Source of generation

According to Time period:

• Long-term finance
• Medium-Term finance
• Short-term finance

Long-term source of finance:

Long-term financing simply means that the capital is required for a period of 1year or more. It may also be 10, 15 or 20 years depending on various factors. Fixed assets like Plant and machinery or building are usually funded using Long-term finance. Part of working capital is also sourced from the Long-term source of finance. Long-term financing sources can be in form of any one of them:

• Share capital or equity shares:

• Term loan from financial institutes, government and commercial banks

Medium-term finance:

Medium-term sources of finance are those which a company has to payback with-in 2-5 years of borrowing and it is usually used for two purposes, at the point when long term capital is not available and second when the revenue expenditures are occurring, such as: advertising expenditure. Medium-term sources of finance may include:

• Medium-term loan from:

1. Government-owned banks.
2. Commercial banks

• Preference shares or preference capital
• Hire purchase finance

Short-term finance:

Short-term sources of finance are those which a company has to payback with-in a time period of 1 year. Current assets of the organization is usually funded by short-term source of finance such as debtors, bank and cash balance, stock of raw materials and finished goods. Short-term sources of finance include:

• Creditors
• Short-term loans from commercial banks
• Bank-overdraft

According to ownership and capital

• Owned capital
• Borrowed capital 

Owned capital:

Owned capital may also be referred as equity shares. This is sourced from promoters of the organization or from the overall population by issuing new equity shares. The Business is begun by the promoters by getting the required capital for a startup. These are the sources for owned capital:

• Retained earnings or net earnings
• Preference shares
• Debentures 

Borrowed capital:

Borrowed capital is the capital that is financed from the sources outside the organization. It is borrowed either from institutions or individuals. All liabilities that do not represent equity are to be considered as borrowed capital.