Businesses require funds to start, operate ongoing activities, and expand. They have two main sources of funds: internal and external. Internal sources include profits, depreciation, and selling assets. External long-term sources are share capital like ordinary shares, preference shares, and deferred shares, as well as loan capital like debentures, bank loans, and mortgages. External short-term sources include bank loans, overdraft facilities, and leasing. The document provides details on different types of internal and external sources of funds for businesses.

2. Sources of Funds
 The need for funds:
No business can live without funds. Throughout
the life of a business, money is needed
continuously. Firms raise money mainly to meet
the following three types of need:
1. To start a business as initial expenditure;
2. To fund continuous business activities and
money flowing;
3. To expand the business.

3. Sources of Funds
Sources of funds
In general, a business may have two major sources
of funds which are needed for its business
operations. They are internal sources of funds and
external sources of funds.
See Table 1 for details.

4. Sources of Funds
Sources of
funds
Internal
Sources
Profit Depreciation
Sales of
Assets
External
Sources
Long Term
Share Capital
Loan Capital
Short Term
Overdraft,
Leasing, etc..
Sources of Funds

5. Sources of Funds
 Internal Sources:
Business generated fund from itself for the
development and expansion. it Can be
achieved through
1. Profit
2. Depreciation
3. Sale of Assets

6. Sources of Funds
 Internal Sources:
1. Profit
It is an important and inexpensive source of
finance, for example, the retained earnings
of the business. A large part of finance is
funded from profit.

7. Sources of Funds
 Internal Sources:
2. Depreciation
financial provision for the replacement of old
machinery and equipments. Nearly all
businesses use depreciation as a source of
funds

8. Sources of Funds
 Internal Sources:
3. Sale of Assets
When a business can not raise finance from
banks or other sources, it may be forced to
sell some assets, such as company cars, land
property, etc. to solve its urgent financial
problems (this activity is called divestment).

9. Sources of Funds
 External Sources:
Business Sources from outside the business
are known as External sources
1. Long Term Sources
2. Short Term Sources

10. Sources of Funds
 External Sources:
1. Long Term Sources
A. Share Capital
The most important source of funds for a limited company. It is often
considered as permanent capital as it is not repaid by the business, but
the shareholder can have a share in the profit, called dividend.
Three types of shares are:
 Ordinary shares: The most common types of shares, and the most riskiest
shares. Dividend depends on the profit of firm. But all ordinary
shareholders have voting rights.
 Preference shares: The share owners receive a fixed rate of return. They
carry less risk than ordinary shareholders. But they are not strictly owners
of the company.
 Deferred shares: These shares are often held by the founders of the
company. Deferred shareholders only receive the dividend after the
ordinary shareholders have been paid.

11. Sources of Funds
 External Sources:
1. Long Term Sources
B. Loan Capital
Any money which is borrowed for a long period of time by a
business is called loan capital.
Three types of shares are:
 Debentures : fixed rate of return, first to be paid
 Bank loans and mortgages : suitable for small to medium sized firms where
property or some other asset acts as security for the loan
 Merchant or Investment Banks : act on behalf of clients to organise and
underwrite raising finance
 Government/EU : may offer loans in certain circumstances
• Grants

12. Sources of Funds
 External Sources:
2. Short Term Sources
A. Bank loans : This is a loan which requires a rigid agreement between
the borrower and the bank. The amount borrowed must be repaid
over a certain period or in regular installments.
B. Overdraft facilities : This is a short term financing from banks.
The amount to be overdrawn depends on the needs of the business
at the time and its credit standing.
C. Leasing : provides the opportunity to secure the use of capital
without ownership – effectively a hire agreement