SOURCES OF FINANCING
Business finance is the funds required to establish, operate
business activities, and expand in the future. Funds are
specifically required various purchase type of tangible assets such
as furniture, machinery, buildings, offices, factories, or intangible
assets like patents, technical expertise, and trademarks, etc.
Apart from the assets mentioned above, other things that require
funding are the day-to-day operational activities of a business.
This activity includes purchasing raw materials, paying salaries,
bills, collecting money from clients, etc. It is essential to have
sufficient amount of money to survive and grow the business.
Companies always seek sources of funding to grow their business.
Funding, also called financing, represents an act of contributing
resources to finance a program, project, or need. Funding can be
initiated for either short-term or long-term purposes. The
different sources of funding include:
Retained earnings
Debt capital
Equity capital
, Retained Earnings
Businesses aim to maximize profits by selling a product or rendering
service for a price higher than what it costs them to produce the goods. It
is the most primitive source of funding for any company.
After generating profits, a company decides what to do with the earned
capital and how to allocate it efficiently. The retained earnings can be
distributed to shareholders as dividends, or the company can reduce the
number of shares outstanding by initiating a stock repurchase campaign.
Alternatively, the company can invest the money into a new project, say,
building a new factory, or partnering with other companies to create a
joint venture.
Debt Capital
Companies obtain debt financing privately through bank loans. They can
also source new funds by issuing debt to the public.
In debt financing, the issuer (borrower) issues debt securities, such as
corporate bonds or promissory notes. Debt issues also include
debentures, leases, and mortgages.
Companies that initiate debt issues are borrowers because they exchange
securities for cash needed to perform certain activities. The companies
will be then repaying the debt (principal and interest) according to the
specified debt repayment schedule and contracts underlying the issued
debt securities.
The drawback of borrowing money through debt is that borrowers need
to make interest payments, as well as principal repayments, on time.
Failure to do so may lead the borrower to default or bankruptcy.
Business finance is the funds required to establish, operate
business activities, and expand in the future. Funds are
specifically required various purchase type of tangible assets such
as furniture, machinery, buildings, offices, factories, or intangible
assets like patents, technical expertise, and trademarks, etc.
Apart from the assets mentioned above, other things that require
funding are the day-to-day operational activities of a business.
This activity includes purchasing raw materials, paying salaries,
bills, collecting money from clients, etc. It is essential to have
sufficient amount of money to survive and grow the business.
Companies always seek sources of funding to grow their business.
Funding, also called financing, represents an act of contributing
resources to finance a program, project, or need. Funding can be
initiated for either short-term or long-term purposes. The
different sources of funding include:
Retained earnings
Debt capital
Equity capital
, Retained Earnings
Businesses aim to maximize profits by selling a product or rendering
service for a price higher than what it costs them to produce the goods. It
is the most primitive source of funding for any company.
After generating profits, a company decides what to do with the earned
capital and how to allocate it efficiently. The retained earnings can be
distributed to shareholders as dividends, or the company can reduce the
number of shares outstanding by initiating a stock repurchase campaign.
Alternatively, the company can invest the money into a new project, say,
building a new factory, or partnering with other companies to create a
joint venture.
Debt Capital
Companies obtain debt financing privately through bank loans. They can
also source new funds by issuing debt to the public.
In debt financing, the issuer (borrower) issues debt securities, such as
corporate bonds or promissory notes. Debt issues also include
debentures, leases, and mortgages.
Companies that initiate debt issues are borrowers because they exchange
securities for cash needed to perform certain activities. The companies
will be then repaying the debt (principal and interest) according to the
specified debt repayment schedule and contracts underlying the issued
debt securities.
The drawback of borrowing money through debt is that borrowers need
to make interest payments, as well as principal repayments, on time.
Failure to do so may lead the borrower to default or bankruptcy.
