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Source of business finance class 11 | Chapter 7 | Source of business finance | Ranjan sharma | @a1studypassion
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1. On the Basis of Period

Finance can be classified into three categories based on the duration for which funds are required:

(a) Short-Term Sources

These are required for a period of up to one year. They are used to meet working capital needs, such as paying wages, purchasing raw materials, or meeting day-to-day expenses.
Examples:

Trade Credit

Bank Overdraft

Cash Credit

Commercial Papers

Bill Discounting

(b) Medium-Term Sources

Funds required for 1 to 5 years are called medium-term finance. They are generally used for modernization, renovation, or expansion purposes.
Examples:

Term Loans from Banks

Lease Financing

Hire Purchase

(c) Long-Term Sources

These are funds required for more than 5 years. They are used for acquiring fixed assets like land, building, or machinery.
Examples:

Share Capital

Debentures

Retained Earnings

Venture Capital

Loans from Financial Institutions

2. On the Basis of Ownership

Finance can also be classified on the basis of ownership:

(a) Owner’s Funds

These are the funds invested by the owners of the business. Owners take the risk of the business, and these funds are not required to be repaid.
Examples:

Equity Share Capital

Preference Share Capital

Retained Earnings

(b) Borrowed Funds

These are the funds raised through loans or borrowings. They are to be repaid with interest after a specified period.
Examples:

Debentures

Bank Loans

Public Deposits

Trade Credit

3. On the Basis of Source of Generation

This classification is based on whether the funds are generated from within or outside the organization.

(a) Internal Sources

Funds generated within the business through operations or retained profits.
Examples:

Retained Earnings

Sale of Assets

Depreciation Fund

(b) External Sources

Funds raised from outside the business.
Examples:

Issue of Shares and Debentures

Loans from Banks and Financial Institutions

Public Deposits

Trade Credit

Conclusion

Every business needs finance for its survival and growth. The selection of a suitable source depends on factors like the purpose of finance, time period, cost, and risk involved. A balanced combination of various sources ensures the smooth functioning and long-term success of a business.

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