requirement of the finance may be classified into two parts:

Long-term Financial Requirements or Fixed Capital Requirement

Long-term financial requirement means the finance needed to acquire land and building, furniture
and fittings, plant and machinery, etc.

Short-term Financial Requirements or Working Capital Requirement

Apart from the capital expenditure of the firms, the firms should need certain expenditure like
acquiring raw materials, day-to-day expenditures, etc. Short-term financial requirements are
popularly known as working capital.

SOURCES OF FINANCE

Sources of finance state that, how the companies are mobilizing finance for their

requirements

Sources of finance may be classified under various categories

1. Based on the Period

Finance may be mobilized by long-term or short-term. When

the finance mobilized with large amount and the repayable over the period

more than five years, it may be considered as long-term sources.

Long-term sources of finance include:

● Equity Shares

● Preference Shares

● Debenture(loan agreement btw the borrower and lender

● Long-term Loans

● Fixed Deposits

Short-term sources: example loans and advances from

commercial banks, moneylenders, etc. Short-term source of finance needs to meet

the operational expenditure of the business concern.

Short-term source of finance include:

● Bank Credit
● Customer Advances

● Trade Credit

● Factoring

● Public Deposits

● Money Market Instruments

2. Based on Ownership

An ownership source of finance include

● Shares capital, earnings

● Retained earnings

● Surplus and Profits

Borrowed capital include

● Debenture

● Bonds

● Public deposits

● Loans from Bank and Financial Institutions.

3. Based on Sources of Generation

Internal source of finance includes

● Retained earnings

● Depreciation funds

● Surplus

External sources of finance may be include

● Share capital

● Debenture

● Public deposits

● Loans from Banks and Financial institutions

4. Based in Mode of Finance

Security finance may be include

● Shares capital

● Debenture

Retained earnings may include

● Depreciation funds

Loan finance may include

● Long-term loans from Financial Institutions

● Short-term loans from Commercial banks.

The above classifications are based on the nature and how the finance is mobilized

from various sources. But the above sources of finance can be divided into three major

classifications:

● Security Finance

● Internal Finance

● Loans Finance

SECURITY FINANCE

If the finance is mobilized through issue of securities such as shares and debenture, it is

called as security finance. It is also called as corporate securities. This type of finance

plays a major role in the field of deciding the capital structure of the company.

Types of Security Finance

Security finance may be divided into two major types:

1. Ownership securities or capital stock.

2. Creditorship securities or debt capital.

Ownership Securities

The ownership securities also called as capital stock, is commonly called as shares. Shares

are the most Universal method of raising finance for the business concern. Ownership

capital consists of the following types of securities.

● Equity Shares

● Preference Shares

EQUITY SHARES

Equity shareholders are the real owners of the company. They have a control over the

management of the company.

Advantages of Equity Shares

1. Permanent sources of finance: Equity share capital is belonging to long-term

fixed capital requirement of the business concern.

2. Voting rights: Equity shareholders are the real owners of the company who have

voting rights. This type of advantage is available only to the equity shareholders.

Disadvantages of Equity Shares

4. Limited income to investor: The Investors who desire to invest in safe securities

with a fixed income have no attraction for equity shares.

5. No trading on equity:When the company raises capital only with the help of

equity, the company cannot take the advantage of trading on equity.

PREFERENCE SHARES

The parts of corporate securities are called as preference shares. Preference shareholders are
eligible to get fixed rate of dividend and they do not have voting rights.

Preference shares may be classified into the following major types:

1. Cumulative preference shares: Cumulative preference shares have right to claim

dividends for those years which have no profits.

2. Non-cumulative preference shares: They are eligible to get only dividend if the

company earns profit during the years.

3. Redeemable preference shares: When, the preference shares have a fixed

maturity period it becomes redeemable preference shares.

4.Irredeemable Preference Shares

Irredeemable preference shares can be redeemed only when the company goes for liquidator.

There is no fixed maturity period for such kind of preference shares.

Features of Preference Shares

The following are the important features of the preference shares:

1. Maturity period: Normally preference shares have no fixed maturity period

except in the case of redeemable preference shares. Preference shares can be

redeemable only at the time of the company liquidation.

4. Control of Management: Preference shareholder does not have any voting

Advantages of Preference Shares

Preference shares have the following important advantages.

4. Participation: Participative preference sharesholders can participate in the surplus

profit after distribution to the equity shareholders.

5. Convertibility: Convertibility preference shares can be converted into equity

shares when the articles of association provide such conversion.

Disadvantages of Preference Shares

1. Expensive sources of finance: Preference shares have high expensive source

of finance while compared to equity shares.

2. No voting right: Generally preference sharesholders do not have any voting

rights. Hence they cannot have the control over the management of the company.

5. Taxation: In the taxation point of view, preference shares dividend is not a

deductible expense while calculating tax. But, interest is a deductible expense.

Hence, it has disadvantage on the tax deduction point of view.

Participating Preference Shares

Participating preference sharesholders have right to participate extra profits after distributing

the equity shareholders.

Non-Participating Preference Shares

Non-participating preference sharesholders are not having any right to participate extra

profits after distributing to the equity shareholders. Fixed rate of dividend is payable to

the type of shareholders.

Convertible Preference Shares

Convertible preference sharesholders have right to convert their holding into equity shares

after a specific period. The articles of association must authorize the right of conversion.

Non-convertible Preference Shares

There shares, cannot be converted into equity shares from preference shares.