Sources of raising long-term capital:
1) Issue of Shares: The amount of capital decided to be raised from members of the public is divided into units of equal value. These units are known as share and the aggregate values of shares are known as share capital of the company. Those who subscribe to the share capital become members of the company and are called shareholders. They are the owners of the company.
a) Issue of Preference Shares: Preference share have three distinct characteristics. Preference shareholders have the right to claim dividend at a fixed rate, which is decided according to the terms of issue of shares. Moreover, the preference dividend is to be paid first out of the net profit. The balance, it any, can be distributed among other shareholders that is, equity shareholders. However, payment of dividend is not legally compulsory. Only when dividend is declared, preference shareholders have a prior claim over equity shareholders.
Preference shareholders also have the preferential right of claiming repayment of capital in the event of winding up of the company. Preference capital has to be repaid out of assets after meeting the loan obligations and claims of creditors but before any amount is repaid to equity shareholders.
b) Issue of Equity Shares: The most important source of raising long-term capital for a company is the issue of equity shares. In the case of equity shares there is no promise to shareholders a fixed dividend. But if the company is successful and the level profits are high, equity shareholders enjoy very high returns on their investment. This feature is very attractive to many investors even though they run the risk of having no return if the profits are inadequate or there is loss. They have the right of control over the management of the company and their liability is limited to the value of shares held by them.
2) Issue of Debentures: When a company decides to raise loans from the public, the amount of loan is divided into units of equal. These units are known as debentures. A debenture is the instrument or certificate issued by a company to acknowledge its debt. Those who invest money in debentures are known as ‗debenture holders‘. They are creditors of the company. Debentures carry a fixed rate of interest, and generally are repayable after a certain period.
3) Loans from financial Institutions: Government with the main object of promoting industrial development has set up a number of financial institutions. These institutions play an important role as sources of company finance. These institutions provide medium and long-term finance to industrial enterprises at a reason able rate of interest. Thus companies may obtain direct loan from the financial institutions for expansion or modernization of existing manufacturing units or for starting a new unit.
4) Retained Profits: Successful companies do not distribute the whole of their profits as dividend to shareholders but reinvest a part of the profits. The amount of profit reinvested in the business of a company is known as retained profit.
5) Public Deposits: An important source of medium – term finance which companies make use of is public deposits. This requires advertisement to be issued inviting the general public of deposits. Against the deposit, the company mentioning the amount, rate of interest, time of repayment and such other information issues a receipt.
Sources of raising short-term capital:
1) Trade credit: Trade credit is a common source of short-term finance available to all companies. It refers to the amount payable to the suppliers of raw materials, goods etc. after an agreed period, which is generally less than a year. It is customary for all business firms to allow credit facility to their customers in trade business. Thus, it is an automatic source of finance.
2) Bank loans and advances: Money advanced or granted as loan by commercial banks is known as bank credit. Companies generally secure bank credit to meet their current operating expenses. The most common forms are cash credit and overdraft facilities. Under the cash credit arrangement, the maximum limit of credit is fixed in advance on the security of goods and materials in stock.
3) Overdraft: In the case of overdraft, the company is allowed to overdraw its current account up to the sanctioned limit. This facility is also allowed either against personal security or the security of assets. Interest is charged on the amount actually overdrawn, not on the sanctioned limit.
4) Discounting of Bills: Commercial banks also advance money by discounting bills of exchange. A company having sold goods on credit may draw bills of exchange on the customers for their acceptance. A bill is an order in writing requiring the customer to pay the specified amount after a certain period (say 60 days or 90 days). After acceptance of the bill, the company can drawn the amount as an advance from many commercial banks on payment of a discount. The amount of discount, which is equal to the interest for the period of the bill, and the balance, is available to the company. Bill discounting is thus another source of short-term finance available from the commercial banks.
5) Short term loans from finance companies: Short-term funds may be available from finance companies on the security of assets. Some finance companies also provide funds according to the value of bills receivable or amount due from the customers of the borrowing company, which they take over.