Introduction of Finance, classification of source of finance according to ownership, period and generation. Define long term financing, medium term financing and also short term financing along with their sources

1. SOURCE OF FINANCE

2. INTRODUCTION
In our present day economy, finance is defined as the provision of money
at the time when it is required. Every enterprise, whether big, medium or
small, needs finance to carry on its operations and to achieve its targets.
In fact finance is so indispensable today that it is rightly said that it is the
life blood of an enterprise.
Why do we need finance?
1. Setting up a business
2. Need to finance our day-to-day activities
3. Expansion
4. Research into new products
5. Special situations such as a fall in sales.

4. LONG TERM FINANCING
These are the source of finance that fulfill the financial
requirements of the business for a longer period which is more
than 5 years. It includes equity shares, preference shares, loans etc.
This finance is generally used for :
• Finance fixed assets
• Expansion of companies
• Increasing facilities
• Construction of projects on a large scale
• Acquisition of companies

5. SOURCE OF LONG TERM FINANCE
• Shares: These are issued to the general public. These may be of
two types:
 Equity shares - Such a shareholder has to share the profits and
also bear the losses incurred by the company. Equity
shareholders are regarded as the real owners of the company.
 Preference shares - A share which entitles the holder to a fixed
dividend, whose payment takes priority over that of ordinary
share dividends.

6. • Debentures: Debentures represent borrowed capital. The
debenture holders are creditors of the company. The debenture
holder gets a fixed rate of interest as return on his investment.
Board of Directors has the power to issue debentures.
• Retained Earnings: The company may not distribute the whole
of its profits among its shareholders. It may retain a part of the
profits and utilize it as capital for further long term activities.

7. MEDIUM TERM FINANCING
These are the source of finance that fulfill the financial
requirements of the business for a period of more than 1 year but
less than 5 years.
Examples of these sources are a loan from banks, public deposits, a
loan from a financial institution.
• Loans from Banks: Many industrial development banks,
cooperative banks and commercial banks grant medium term
loans for a period of 2-4 years for supporting the long term
capital investments by the company viz., purchase of Fixed
Assets, expansion etc.

8. • Loan from Financial Institutions: There are many specialized
financial institutions established by the Central and State
governments which give long term loans at reasonable rates of
interest for the long term capital investments by the company.
• Public Deposit: It implies any money received by a company
through the deposits or loans collected from the public.

9. SHORT TERM FINANCING
Short Term Business Finance are required to meet its day to day
expenses. These are the funds that are required for less than a
year. It enables continuous availability of liquid cash to meet day to
day expenses. It is also known as Working Capital Finance.
The purpose of short term business finance is as below:
• Purchase of raw material
• Paying wages to workers
• Payment of water and electricity charges

10. SOURCES OF SHORT TERM FINANCE
• Trade credit - Trade credit refers to credit granted to
manufacturers and traders by the suppliers of raw material,
finished goods, components, etc.
• Short term Bank Loan - When a certain amount is advanced by a
bank repayable after a specified 9 period, it is known as bank
loan. The period is usually short .

11. • Factoring - Factoring is a type of finance in which a business
would sell its accounts receivable (invoices) to a third party to
meet its short-term liquidity needs. Under the transaction
between both parties, the factor would pay the amount due on
the invoices minus its commission or fees.
• Commercial Paper or CP is defined as a short-term, unsecured
money market instrument, issued as a promissory note by big
corporations having excellent credit ratings.

12. MODERN SOURCES OF FINANCE
Modern days the ways have changed as to how Startups and
established business are sourcing funds for business.
Below are the unconventional sources of Finance:
 Angel Investment
 Venture Capital (VC)
 Private Equity (PE)

13. Angel Investment
• An angel investor is an experienced industry person who
provides needed funds for small startups or entrepreneurs in
exchange for ownership equity in the company.
• Angels invest their time, experience, network and energy in
business they invest in.
• Angel investors are found among an entrepreneur's family and
friends.
• The funds that angel investors provide may be a one-time
investment to help the business get off the ground or an
ongoing injection to support and carry the company through its
difficult early stages.
• Sanjay Mehta, an Angel Investor has invested in several startups
viz., OYO Rooms, Fab Alley, Orange Scape etc.

14. Venture Capital (VC)
• Venture capital (VC) is money provided to seed early-stage,
emerging growth companies.
• It represents financial investment in a highly risky project with
the objective of earning a high rate of return.
• Venture capital funds invest in companies in exchange for equity
in the companies they invest in, which usually have a novel
technology or business model in high technology industries,
such as biotechnology and IT.
• Food panda is funded by a Venture Capital Firm, Rocket Internet.

15. Private Equity (PE)
• Private equity (PE) refers to capital investment made into
companies that are not publicly traded.
• Private equity consists of investors and funds that make
investments directly into private companies or conduct buyouts
of public companies that result in a delisting of public equity.
• Capital for private equity is raised from retail and institutional
investors, and can be used to fund new technologies
• Justdial, the local search engine was funded by Private Equity
Investors like Sequoia Capital and SAP Ventures.