Page 34 - DMGT409Basic Financial Management
P. 34

Unit 2: Source of Finance




               Based on the period for which the funds are required, business finance is classifi ed as:  Notes


                    Short-term finance (for a period of less than one year)

                    Medium-term finance (for one year to fi ve years)

                    Long-term finance (for more than fi ve years).
               There are two sources of raising the required funds by the business (i) internal source –
               owner’s capital, retained earnings, and (ii) external source-friends and relatives, banks,
               other financial institutions, money lenders, capital market, etc.

               Methods of raising long-term fi nance are:

                    Issue of Shares
                    Issue of Debentures
                    Loans from fi nancial institutions
                    Public Deposits
                    Retention of Profi t
                    Term loans form Banks

                    Lease Financing
               Methods of Raising short-term fi nance are:
                    Commercial Papers (CPs)

                    Certificates of Deposit
                    Treasury Bills
                    Inter-Corporate Deposits (ICDS)
                    Trade Credit
                    Deferred Income

                    Commercial Banks
                    Factoring etc.

          2.5 Keywords

          Accruals: Accrued expenses are those expenses which the company owes to the other persons or
          organisations, but not yet due and not yet paid the amount.

          Commercial Paper: It represents a short-term unsecured promissory note issued by fi rms that
          have a fairly high credit (standing) rating.

          Deferred Income: Deferred incomes are incomes received in advance by the firm for supply of
          goods or services in future period.
          Equity Share: Equity means ‘equal’. Equity share is a share that gives equal right to holders.


          Factoring: Factoring is a financial service covering the financing and collection of book debts
          and receivables arising from credit sale of goods and services, both in the domestic as well as
          international market.

          Inter-corporate Deposits (ICDs): A deposit made by one firm with another firm is known as

          Inter-corporate Deposits (ICDs).




                                           LOVELY PROFESSIONAL UNIVERSITY                                    27
   29   30   31   32   33   34   35   36   37   38   39