SOURCES OF FINANCE

Sources of Finance

Sources of Finance

Introduction

A business organization requires an external source of financing to finance its short term and long term plans and activities to meet the demands and needs of the organizational activities. Sources of finance help the management of an organization to meet needs of its short term operating activities such as salaries and payroll, cost of materials and other administrative activities. The sources of finance also help the senior management of the organization to meet the demands of the long term activities of the organization such as acquisitions, mergers and other expansion projects. Sources of finance play a vital role in financing the organization's long term and short term business activities in the case of shortage of private funds and access to financial markets (Banks, 2011, pp. 12).

A business organization can use different sources of funds under different circumstances. The two most common sources of financing an organization's business operations and activities include debt financing and equity financing.

Debt financing - Debt financing refers to when an organization issues convertible or regular bonds in financial markets. The bondholders receive interest payments periodically and the principal amount is returned at the maturity period.

Equity Financing - Equity financing refers to the situation when an organization raises funds by selling its shares of stocks and equity in security exchanges. The stockholder or shareholder receives regular dividend payments and gets an opportunity to receive profits when stock prices increase (Atkinson, 2005, pp. 24).

These are the two main sources through which an organization finances its business operations; but there are other sources of finances available through which an organization finances its business operation which further divide the above mentioned sources of finance.

Sources of Finance

As we have discussed that business organization utilize different sources of financing to continue its business operations and activities in case of shortage of cash in hand. Some of the most prominent sources of finance that an organization may use are discussed briefly as follows.

Bank Loans

An important source of financing which an organization could use is acquiring loans from banks. This would allow the organization to obtain money in the form of short, medium and long term loan to meet the financing requirements of the organization such as working capital, asset needs, etc. By taking loans, it is assumed that an organization could make appropriate cash flows which would help the organization to pay the periodic interest payments and return the principal amount as well. A requirement that the bank asks to fulfill includes providing the bank with some sort of security at the time of advancing the loan (Cox, 2006, pp. 37).

Share Capital

Share capital basically refers to trading the company's stock in the financial market. The company issues its shares to shareholders against cash or some equivalent item of the value of capital. For instance, an organization can select to issue its shares in exchange of computer servers instead of purchasing it with cash. Share capital is general referred to the sum of capital that an organization receives ...