Detailed Guide on Sources of Finance for Businesses

Finances are integral to business operations and are highly important for organizations. Businesses need funds to conduct different business activities and expand their horizon and lack of it will jeopardize business workflow. The main sources of finance that are obtained by a business body depend on factors like situation, cost, purpose, and more. 

What Are the Top 6 Sources of Finance?

There are multiple sources of finance by which businesses can attain financial stability. Every source of finance has its own set of particularities which must be evaluated by business bodies or an individual, helping them opt for the best way of acquiring funds.

• Trade Credit

A tax credit is another one of the significant sources of finance for the short-term where a trader extends credit to another trader against purchase of any services or products.

Such a finance option does not demand immediate payment for the purchase of goods and is extended to consumers who have robust financial status and credibility. Businesses opt for trade credit to enhance the business cash flow, increase business volume etc. 

The amount extended under trade credit is based on the reputation of the purchasing firm, prevailing competition, payment history of sellers etc. The terms of this finance option vary across different industries. 

• Factoring

Factoring is one of the sources of finance where businesses sell their invoices (accounts receivables) to factor or a third party at some discounts and meet their liquidity needs. In this financial service,control over all the debt collection and credit control is taken by the factor. The third-party secures an organisation from bad debt losses. Further, factoring is categorised into two means: recourse and non-recourse.

• Retained Earnings

Retained earnings are means of self-financing or internal finance. In this type of finance option, an organisation uses a part of their net earnings to support future business operations. Generally, a company does not release its profits or earnings to the shareholders. 

The part they have retained in ensuring robust business operation and making reinvestments. However, retained earnings that can be used for reinvestments depend on dividend policy, the organisation’s age etc.

• Issue of Shares

Shares are a small percentage of a company’s working capital. The firm’s capital is divided into small units and issued to shareholders. The fund obtained through the issuance of shares is termed as ‘Share Capital’. 

Shares can be classified into two categories:

• Equity Shares	Equity offerings can help in enhancing business cash flow. In these shares, no fixed dividend is paid out and the owner of the company pays the equity shareholders amount based on the profitability of the company.
  Preference Shares	In preference shares, shareholders get a specific dividend rate. Further, during liquidation, preference shareholders exercise the right to get their capital before the equity shareholders. However, preference shareholders do not have voting rights in the management of the company.

• Commercial Banks

One of the major sources of finance from which business draws their capital is commercial banks. Business bodies can avail of loans from banks in different ways like overdrafts, bill discounting, cash credits, term loans etc. The interest that business bodies have to pay on the sanctioned credit differs based on the particular bank, amount sanctioned, duration of the loan etc.

• Financial Institutions

Financial institutions also referred to as ‘development banks’ are another source of finance for businesses. These are established to cater to both the long and medium-term financing needs of a business body.

Debt capital is the fund that businesses gather from external finance sources. Both commercial banks and financial institutions are major sources of debt financing. 

Besides offering financial assistance, financial institutions conduct surveys and extend management services and technical assistance to organisations. Enterprises used the sanctioned amount for expansion, reorganisation etc. 

RazorpayX offers the line of credit facility which helps business bodies gain access to the necessary amount and ensure efficient business functioning without pledging any collateral. Line of credit is a major source of finance that allows an organisation to access an amount of ₹25 lakhs. 

How RazorpayX Has Emerged to Be a Robust Source of Finance for Businesses?

RazorpayX meets all the banking and financial needs of a business body. The platform brings coherence, effectiveness and excellence to the overall business financial process. 

In addition, RazorpayX Forex service helps businesses acquire foreign capital. It is a great source of finance for startup businesses. Besides offering an outlook on the forex rates, the team of experts here will extend advice and do all the paperwork on the behalf of a business entity.

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