Sources Of Company Financing

Financial requirements of a company
 
 Sole proprietorship and partnership forms of business organizations are mostly run on small scale bsis. they generally meet their fixed and working capital requirements from their owned capital. It is only the company form of organization which is run on large scale basis. It requires huge amount of funds to purchase fixed assets meeting day to day expenses of business (working capital) and for modernization and replacement of machinery.

Financial requirements of a company

  Sole proprietorship and partnership forms of business organizations are mostly run on small scale bsis. they generally meet their fixed and working capital requirements from their owned capital. It is only the company form of organization which is run on large scale basis. It requires huge amount of funds to purchase fixed assets meeting day to day expenses of business (working capital) and for modernization and replacement of machinery.

Sources Of business Funds
      There are two principal sources of raising funds for a company (1) Owners and (ii) Creditors. the capital which is supplied by the owners themselves is called owned capital and that which is provided by the creditors is described as borrowed Capital.

l- Owners Capital           
            Owner's fund also called owned capital or ownership capital consists of the amount contributed by owners as well as the profits invested in business. Owners fund provide risk capital. it provides the basis on which owner acquire their right of control over managment. owner's found also provide permanent capital to the business. A company can raise owned capital in the following ways.

(1) Issue of equity shares. A company can raise owned capital by issue of ordinary shares also called equity shares. the equity shares are a very good source of long term finance for a compny.  They are only paid back when the assets of a company.

(2) Ploughed back profits. A good running company retains some of the profits in the business  at the end of the  year. these are not distributed to the shareholders. the portion of the profits retained every year accumulates in the from of reserve. These receipts are utilized for meeting working capital requirements and for expansion of business.

ll-Borrowed Capital         The second  source of funding to a business is the borrowed fund. Borrowed fund consists of the amount raised by way of loans or credit. The borrowed fund is procured from the following sources.

(1) Debentures. It is an instrument of credit acknowledging debt. it is issued by the company under its common seal. debenture carries a contract for payment of fixed rate of interest and repayment of the principal after a certain number of year. Debenture enables the company to raise long term finance without giving control of the company to debenture holders.
The amount raised through debenture is generally used for financing fixed investment specially for balacing, modernization and expansion of the industrial units. Debenture financing in pakistan has been replaced by issuance of a new corporate security called participation term certificate (PTC).
The merits of debentures are that they are generally low cost. the debenture holders do not have any control or interference in the management of the company. The company has also the advantage of trading on equity.

(2) Bank Loans. Traditionally, the commercial bank used to give short term loans nowadays, the have extended their loan operations into medium and long term finance. There are generally five types of credit available to business from bank (1) Overdraft (2) Cash credit (3) Advances against bill (4) short term loans against security and (5) Long period mortgage loans.

(3) Loans from specialized financial institutions.. There are a number off specialized financial institutions which provide medium and long term finance to business. The loans are provided both in the local and foreign currency for setting up new industries, modernization and replacement of existing units etc.

(4) Other long term financial institutions. There are also a number of  other financial institutions which have suffcient funds to invest in long term financing. these are saving  centres, life Insurance companies, Mutual funds etc.These institutions are primarily concerned for the purchase of shares of the well reputed companies, bonds also long term loans.

The diagram shows two sources of the capital requirements of a
business (1) owners and (2) Creditors. The capital required is used
to purchase fixed assets and current expenses of the business.
How much and what type of capital is required depends upon the
nature of the company.