Sources of corporate finance of business are equity, debentures, debt, retained profits, working-capital loans, term financing, letter of credit, venture funding and so forth. All source of corporate financing has always been used for different purpose at different situations. Sources to corporate finance have always been the most special area for the entrepreneurs who are more towards starting a new business. It is possibly that the toughest function of all the many efforts. There are many different sources of corporate finance, we will classify below based of their parameters.
Top Best – Source of Corporate Finance:
Having understood that there are numerous alternatives towards source of corporate finance, selecting the well supply and also the best mix concerning finance is a key challenge towards every person who manages finance. The process of picking that well source of corporate financing involves at-depth evaluation of every source of investment. For examining plus comparing each sources of finance, it needs your understanding of all the attributes associated with the funding sources. There have always been some characteristics for each type of sources of corporate finance. Let us understand in depth more about it:
1. Long-Term Source of Corporate of Finance:
Long-term financing means that fund required are over 5, 15, 20 years of period or even more dependent on factors. Capital requirement for equipment, fixed assets, plants and machinery of the business are definitely funded using long-term sources of corporate financing. Long-term financing is available in various types to a company. For example: Preference Shares, Debenture or Bonds, Equity Shares, Internal Accruals, Asset Securitization, Venture Funding, Overseas Financing through Foreign currency financing, Term Financing from Government, Financial Institutes or Retail Banking and more.
2. Medium-Term Sources of Corporate Financing:
Medium term funding means funding for 3 to 5 years of period and it is usually applicable for 2 main purpose. Firstly, when long-term capital is actually unavailable at specific time period. Secondly, whenever deferred income expenditures just like promotions, advertisements occur that will be written off from the books of accounts over 3 to 5 years of period. Medium-term source of corporate financing is available in the types like: Preference Capital, Medium Term Loans from Financial Institutes or Commercial Banks, Lease Finance, Bonds or Debenture, Hire Purchase Finance and more.
3. Short-Term Sources of Corporate Finance:
Short term funding means that financing for less than 1 year of duration. The need for short-term finance arises to finance the present assets of the business just like raw material, debtors, finished good, shorting of liquid cash or bank balance and so on. Short-term finance is also called as working-capital finance. Short term funds are definitely available in the form of Trade Credit, Creditors, Payable, Short Term financing like Working Capital Loans from Commercial Banks, Advances received from customers, Bill Discounting, Factoring Services Fixed Deposits for a period of 1 year or lesser and much more.
4. Equity Capital:
Equity capital is also called as owned capital. It is source of corporate finance from promoters for the company or through the public by just issuing new equity shares. Promoters initiate your business simply by delivering the capital requirement for start-ups or any business. For example: through Equity Capital, Retained Earnings, Preference Capital, Venture Fund or Private Equity, Convertible Debentures and much more such kinds of options.
More, as soon as the business grows then earnings of this firm are really not enough to fulfill the financial needs of a business. Promoters have to select non-ownership capital or ownership capital. This particular decision is up to their promoters that how do they further what to source the corporate finance to expand the company.
5. Borrowed Capital:
Debt capital or borrowed money is the capital set in place from sources from outside. These types of resources are: Commercial banking, Financial Institutions, etc. These type of sources of corporate finance meaning the business will likely repay to the borrower by just offering or selling assets for liquidation purpose. An additional way of repayment is by paying fixed interest along with principal payment.
6. Internal Source of Corporate Financing:
The inner source of capital is that the money and was produced internally by your business. For example: Retained profits, Sale of assets, controlling or minimizing of working capital, etc. Internal source of corporate finance offers the same characteristics to that of owned capital. Best part of the internal source of corporate financing is that the business grows through themselves as well as does not rely on other source of finance from outside. Drawbacks of each debt capital and equity capital have always been maybe not present in this particular source of corporate finance. Best part is that ownership does not get diluted nor the risk of bankruptcy arises.
7. External Source of Corporate Finance:
An external source of corporate finance is that money created from outside source of the business. Choosing each best sources of corporate financing is an important business decision taken through top-level of finance managers / supervisors. The incorrect source of corporate financing increases cost of project which would have direct effect in the feasibility of project. Poor style of capital at business criteria might go up badly and may lead to bankruptcy of this business as well. For-example, assuming fixed assets, that will give advantages to business for 2 years, are definitely financed by using short-term funds can create cash flow mismatch after one year while the supervisor will once again need to search for finances as well as need to raise the funds to replace that poor quality of fixed asset after 1 year.
That principal sources of corporate finance is either equity capital or preference capital. Their equity shares offered your security opposing short-term. For example: They will not really issue dividend in-case there are no profit earning for couple of years. However, equity shares do have some pros and cons. It is always advisable to go through all the sources of corporate financing and look for advantages and disadvantages before finalizing your decision.
- Tutorial Course - Corporate Finance Basics For Beginners -
» e-Learning Chapter 1: What is Corporate Finance with Examples
» e-Learning Chapter 2: Objectives of Corporate Finance
» e-Learning Chapter 3: Importance of Corporate Finance
» e-Learning Chapter 4: Types of Corporate Finance
» e-Learning Chapter 5: Principles of Corporate Finance
» Currently Reading: Sources of Corporate Finance
» e-Learning Chapter 7: Functions of Corporate Finance
» e-Learning Chapter 8: Nature of Corporate Finance
» e-Learning Chapter 9: Scope of Corporate Finance
» e-Learning Chapter 10: Corporate Finance Quiz - Question and Answers