Sources of Finance

A business can raise funds from many different sources, and each has its own characteristics that must be understood before choosing. The key idea is that there is no single "best" source for all organisations — the right choice depends on the situation, purpose, cost and risk involved.

For example:

• To meet fixed capital requirements, a firm needs long-term funds, which can be raised as owned funds or borrowed funds.
• To meet day-to-day requirements, the firm can tap short-term sources.

The subsections that follow describe each source in turn, along with its merits and limitations:

• Retained earnings (§8.4.1) — self-financing from ploughed-back profits.
• Trade credit (§8.4.2) — credit from suppliers.
• Factoring (§8.4.3) — selling receivables to a factor.
• Lease financing (§8.4.4) — renting an asset instead of buying it.
• Public deposits (§8.4.5) — deposits taken directly from the public.
• Commercial paper (§8.4.6) — an unsecured money-market instrument.
• Issue of shares (§8.4.7) — equity and preference share capital.
• Debentures (§8.4.8) — long-term debt capital. …