Internal Sources of finance
Funds are generated in two ways: – 1. generating profit and retaining them in the business. 2. By selling some of his assets. Only successful business can retain the profit. It is very difficult to decide how much profit should retain and how much should distribute. Retaining a large proportion of profit requires a long-term view. Retained profit is the most important source of finance for small as well as large-scale business.
Sale of Asset: –
If the firm has no other way to arrange funds from any source, then reluctantly the firm sells a particular division or a subsidiary business. Sale asset is a quite normal part of the business. Sometimes the firm buys another firm with the intention of raising finance by selling off its assets. This is known as asset stripping.
External Source of Finance
This source is divided into two parts, first is short term funds and second is long term funds. Long-term funds are very useful for new business but all types of businesses need capital planning. Long-term funds are of two types: –
1. Share Capital 2. Loan Capital
Shares are the proof of ownership. Each shareholder has a share in the business. Shares can be sold at a profit. If a company wants to arrange a lot of funds through the share, it can offer the shares for sale to outsiders. When the private company issues
Long term loans are part of the capital of the business. Long term loans come in forms of mortgages, long-term bank loans, venture capital, and debenture.