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Every company requires funds for investment in business. In a business, funds are required to purchase various fixed assets such as land and buildings, machinery, furniture etc and for meeting the day to day requirements of the business such as for purchasing raw-materials, paying salaries and wages and incurring expenses. While estimating the needs for funds, the period for which they are required is also to be ascertained. Funds may be required for long term, medium term and short term. It is the period of finance which determines the source of finance i.e. agency from where the funds can be procured.
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Long-term finance is required for investment in fixed assets and for financing expansion programmes. Long-term finances are raised for a period of 10 years or more. Main sources for raising long-term funds are shares, debentures, retained earnings and financial institutions providing long term funds.
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Medium-term funds are those funds which are required to invest in permanent working capital and for repayment of debts. These are raised for a period ranging from more than one year but less than ten years. Most possible sources for medium term funds can be redeemable preference shares, debentures, public financial institutions, public deposits and commercial funds.
Short-term funds are required to meet the short-term needs of working capital. These are raised for a period of not more than 12 months and from the sources of public deposits, trade creditors and commercial banks, installment credit etc.
Various sources of finance can further be grouped in two parts (a) owner’s funds and (b) borrowed funds. Owner’s fund include share capital and retained earning. Borrowed funds include debentures, loans and credit from public financial institutions, public deposits, banks etc.