Often the hardest part of starting a business is raising the money to get going. The entrepreneur might have a great idea and clear idea of how to turn it into a successful business. However, if sufficient finance can’t be raised, it is unlikely that the business will get off the ground. Importance of Finance Finance is very important for business organisation . Finance includes planning of financial resources, making of optimum capital structure and effective utilization of financial resources by deep analysis of cost of capital and capital budgeting tool. It is very advance technology.
Like other technology, it can also increase the efficiency of business, so effective utilisation with reasonable care is very necessary in Finance. Without this Finance can become dangerous for company. Suppose , if company obtains large amount through his network resource but company has not made good financial planning regarding its effective utilisation , then Company can reach at the stage of Bankruptcy , because If Company has not good plan for investment , it will unable to provide good return to its creditor and shareholder , after this Creditors of Company can aback Company after demanding their fund .
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So, study of finance and its tool is very important. Internal and External Source of Finance Internal source of finance: comes from the trading of the business. External source of finance: comes from individuals or organisations that do not trade directly with the business e. g. banks. Internal source of finance tends to be the cheapest form of finance since a business does not need to pay interest on the money. However it may not be able to generate the sums of money the business is looking for, especially for larger uses of finance. Examples of internal source of finance are: Day to day cash from sales to customers. * Money loaned from trade suppliers through extended credit. * Reductions in the amount of stock held by the business. * Disposal (sale) of any surplus assets no longer needed (e. g. selling a company car). Examples of external source of finace finance are: * An overdraft frm the bank. * A loan from a bank or building society. * The sale of new shares through a share issue. Terms of Financing. 1. Short Term Financing: Short term finance: This type of finance is required for a period of less than a year. It is required to provide working capital for the business.
The working capital is needed to purchase of raw material, payment of wages, salaries and meeting day to day expanses of the business. Short term finance may be required to meet the seasonal requirements of business. It is available at low rate of interest. Short-term financing can be raised from the following sources: * Trade credit * Commercial banks * Fixed deposits for a period of 1 year or less * Advances received from customers * Various short-term provisions 2. Medium term finance To finance a business for a period of more than a year but less than 10 years is called intermediate financing.
Such type of finance is obtained for expansion and modernization of existing plant. It is also needed for the purchase of assets, costly raw material. It may be used to meet the cost of maintenance, repair, improvement and betterment of plant. Lastly, it can be used to repay the short term loans. Medium-term financing can be raised from the following sources: * Preference shares * Debentures/bonds * Public deposits/fixed deposits for duration of three years * Commercial banks * Financial institutions * State financial corporations * Lease financing / hire purchase financing External commercial borrowings * Euro-issues * Foreign currency bonds 3. Long term Finance A business requires funds to purchase fixed assets like land and building, Plant and machinery, furniture etc. These assets may be regarded as the Foundation of a business. The capital required for these assets is called fixed capital. A part of the working capital is also of a permanent nature. Funds required for this part of the working capital and for fixed capital is called long term finance. The purpose of long term finance are: 1. to buy fixed asset such as : manchines, buildings, furniture etc… 2.
To finance the permanent part of working capital. 3. To expand the business Long-term financing can be raised from the following sources: * Share capital or equity share * Preference shares * Retained earnings * Debentures/Bonds of different types * Loans from financial institutions * Loan from state financial corporation * Loans from commercial banks * Venture capital funding * Asset securitisation Factor Affecting Choice of Financing When a firm needs finance. It becomes crucial to pick how much finance they need and for how long. It can ruin or make a business. A firm will have a ide range of sources to choose finance from such as a bank loan or overdraft, share capital, venture capital, profit, or trade credit. However, some sources of cash are suited best for short term while others are best for long term and some suited for little injections of cash while others are suited to huge injections of cash. The Source of finance chosen will depend on a number of factors: * Purpose – what the finance is to be used for. * Time Period – how long the finance will be needed for. * Amount – how much money the buisness needs * Ownership and size of the buisness