1) Explain in detail various sources of finance.
Sources of finance are primarily classified into2 types / parts –
External Sources
Internal Sources
These have been further explained in details ahead -.
External Sources of finance, refer to the money that comes from outside a business. There are
several external methods that a business can use 6 including family & friends, bank loans &
overdrafts, venture capitalists & business angels, new partners, share issue. trade credit, leasing,
here purchase & government grants.
Family & Friends- businesses can obtain a loan or be given money from family friends not need to be
paid that may back or are paid back with little or no interest charges.
Overdrafts- this is where a business or person uses more money than they ham in their account. This
means that the balance figure is vegetative.
New partners who are these are an addition person or people who are brought into the business as
a new business partner. This means, they would provide money to their own part of business.
Share Issues- a business may sell more of their raise money. Buying shares the buyer partial
ownership of the business & then certain right.
Leasing: it is a way of renting an asset that the business requires, eg coffe machine monthly
payments are made and the leasing company is responsible for the provision & upkeep of leased
items.
Hire Purchase: it is used to purchase an asset, such as delivery van or piece of equipment. A deposit
is aid in monthly installments over a set of period of time.
Government grants – these are fixed amount of money awarded by the government. Grants are
given to a business on the condition that they must maintain certain crrerteria such as providing jobs
in the areas of unemployment.
2) Internal sources of financeInternal sources of finance refer to the money that comes within a business. There are several
internal methods a business can use including owners capital , retained profit and selling asstes.
Owners capitalThis refes to the money invested by the owner of a business . this often comes from their personal
savings. Personal saving is basically the money that is saved by an entreprenure.
Retaines profitsThis is when a business makes a profit. It can lease source or all of this money in the business and
reinvest it in order to expand. This source of finance does not incur intrest charges or require the
payment of dividend.
Selling asstesThis involes selling products owned by the business. This may be used when either a business no
longer has a use for the product or they need to raise money quickly. Business assets that can be
sold include for example- machinery , equipment and excess stock.
Funds can further be classied on the basis of 3 major components which are1) Basis of period.
2) 2) basis of ownership.
3) 3) basis of source of generation.
Basis of period.
These are classiefies further into 3 types Long term
 Medium term
 Short term.
Long term-these include various sources such as equity shares earings debentures, loan from
financial institutions & loan. from banks.
Medium term- these include various sources loan from banks, public deposits, loan from financial
institutions & lease financing.
Short term- this include trade credit , blanks , commercial paper.
On the basis of Ownership- these are classified as


Owners fund – these includes eqity shares and retaibed earnings.
Borrowed funds- these include depentures , loans for banks , loans from financial institutes ,
public deposits , lease financing and commercial papers.

On the basis of generation –
These are classified as – internal and external sources.
Internal sources – these include equity share capital and retained earnings.
External sources- these include financial institutions , loans from banks , preference shares ,
public deposits , debentures , lease financing , commercial papers , trade credit and
factoring.