What are the different sources through which a company can raise money?

What are the different sources through which a company can raise money?

 Companies nowadays have various options available to get funding for their short as well as long term goals. Basically, the sources of funds can be categorized using 2 criterias:
  • On the basis of time: A company has different objectives to borrow fund. It may be a short term requirement to fund the working capital or a long term requirement such as setting up of new manufacturing plant. Different requirements ask for money over different time horizons. A medium-term requirement would basically comprise of 2 things, unavailability of long term funds or advertisement expenses that need to be written off over a period of 3-5 years.
  1. Long Term: Long term sources of funds are usually raised for more than 5 years. Some major examples would be equity shares, preference shares, debentures, long term bank loans, venture fundings, etc
  2. Medium Term: These sources help raise money for a horizon of 3-5 years. For example, preference shares, debentures, loans from the government or financial institutes, lease finance and hire purchase finance.
  3. Short Term: Short term sources of funds are raised for a period of less than 1 year. They are usually borrowed to make inventory purchases or to fund the selling expenses. These would include trade credit, working capital loans, advance received from customers, creditors, payables, bill discounting, etc.

  • On the basis of ownership and control: Another major factor that needs to be taken into consideration is the fund's cost. Debt is always cheaper than equity. Shareholders are very greedy but that is because they take the risk of losing out all their money. Owned funds shell out the ownership as well as the control to the fund provider and thus he becomes part of strategic decisions made in the company. Borrowed funds are low in cost as they require only a fixed percentage to be paid to the fund provider. However, borrowed funds carry a high risk from the point of view of a company as the interest obligations need to be fulfilled even though the company suffers loss.
  1. Owned: These dilute the decision making power in a company. Examples of owned funds are equity capital, preference capital, retained earnings, convertible debentures, and venture fund or private equity.
  2. Borrowed: These fund sources do not get involved in the strategic decisions of the firm. They are only concerned about the timely repayment of the principal and interest amount on the corpus borrowed. These include normal debentures, loans from financial institutions and commercial loans.
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