On the Basis of Ownership

Owner’s Funds

Equity Shares

Retained Earning

Borrowed Fund

Debentures

Loan from banks

Loan from Financial

Institution

Public Deposits

Lease Financing

Owner’s Funds

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• Funds provided by owners (individual, partners, or shareholders)
• Includes reinvested profits / retained earnings
• No repayment required during business lifetime
• Gives owners control over management

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Borrowed Funds

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• Funds raised through loans (e.g., debentures, bank loans, public deposits, trade credit, lease financing, commercial papers, factoring)
• Must be repaid within a specific period
• Legal obligation to pay interest regularly
• Usually secured against assets (e.g., bonds, land, buildings, stock, vehicles, machinery)

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On the Basis of Generation of Funds

Internal Sources

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• Funds generated within the business (e.g., retained earnings, collections from receivables, surplus from sale of old assets)
• Can meet only limited business needs

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External Sources

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• Funds raised from outside the business
• Examples: issue of shares, debentures, bank & institutional loans, public deposits, factoring, leasing, hire purchase

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Factors Influencing Choice of Business Finance

Cost

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• Analyze cost of raising and using funds
• Lower interest rates make options like public deposits, debentures, and term loans preferable

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Financial Capacity

of the Firm

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• Financially strong firms can pay interest and repay capital on time
• Such firms can use borrowed funds
• Financially weak firms rely more on owner’s funds

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Forms of Organisation

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• Choice of funds depends on business type
• Sole proprietors and partnerships can’t issue shares/debentures
• They rely on short-term sources (bank finance, leasing, hire purchase, factoring)
• Companies, government & cooperatives use both long-term (shares, debentures) and short-term sources

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Time Period

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• Source depends on duration of fund requirement
• Short-term needs: bank overdraft, cash credit, bill discounting, mortgage, pledge, leasing, hire purchase, factoring
• Long-term needs: shares, debentures, bonds, term loans

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Risk Factor

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• Owner’s funds carry no repayment risk
• Borrowed funds involve risk of default
• Failure to pay interest or capital may lead to business liquidation and damage reputation

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Control

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• Equity shareholders are the real owners and control the company
• Issuing more equity shares may dilute existing shareholders’ control
• Borrowed funds do not affect management control
• Borrowing helps maintain administrative control

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Stage of Development

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• New businesses often rely on owner’s funds due to difficulty in raising finance
• Established firms can access borrowed funds using assets as security

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Credit Worthiness of Firms

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• Borrowed funds like debentures may require mortgaging assets, affecting creditworthiness
• Owner’s funds, retained earnings, and unsecured loans don’t require asset mortgage
• Maintaining assets unencumbered helps preserve a good financial market image

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