Source of Fund
Sources of Funds are the means or ways from which an organization or individual collects the money required for their financial activities. These sources can be mainly of two types: Internal Sources and External Sources. Below is an analysis with examples of different funding sources:
1. Internal Sources of Funds
(a) Profit:
The main source of income of the organization is its profit. Profits earned from business activities can be used for further investment.
Example 01: A company made a profit of $500,000 in a year and invested that money in new product development.
(b) Retained Earnings:
The firm may retain some of its past profits, which are used as future investments or expenses.
Example 02: A company has invested in a new project from their reserves of $1,000,000.
(c) Sale of Assets:
Organizations can raise money by selling their redundant or non-current assets.
Example 03: A company collected $200,000 by selling their old machine and used it to purchase new machine.
2. External Sources of Funds
(a) Equity Capital:
Companies usually raise money by selling shares. Shareholders get profit or dividend against shares.
Example 04: A startup company raised $50,000,000 by issuing shares, which they used to develop new technology.
(b) Debt Financing:
Institutions borrow from banks, financial institutions or by issuing bonds. The loan has to be repaid with interest within a specified period.
Example 05: A company took a loan of $5,000,000 from a bank for their expansion and built a new factory with that money.
(c) Issuance of Bonds:
By issuing bonds, the organization borrows money from the public or investors for a specified period of time. Investors get a fixed interest rate.
Example 06: A government institution has issued a bond of $10,000,000 for implementation a new project.
(d) Investment (Investment from Venture Capital or Private Equity):
Especially startups or new companies receive investment from venture capital or private equity.
Example 07: A technology company has received an investment of $200,000,000 from a venture capital firm to grow their business.
(e) Government Grants or Subsidies:
Some organizations receive government grants or subsidies, which support their business activities or research activities.
Example 08: A solar energy company received a grant of $50,000,000 from the government for renewable energy research.
(f) Forward Contracts or Lease (Leasing or Forward Contracts):
Firms manage finance by leasing or forward contracts instead of buying assets.
Example 09: A company leases a machine instead of buying it, so that their initial capital investment is less.
More Resources
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