Sources of Finance

Finance refers to the way and means that an individual or an entity to acquire an asset. Assets are anything, tangible or not, of which the owner has a claim on. Assets are purchased to derive a benefit from. In corporate scenarios, assets are usually purchased to obtain a profit from.

The profit may not necessarily involve the sale of the asset purchased for a higher price but may be used in the operations or deals that the business may engage in to generate sales.

As mentioned earlier, in order to obtain an asset, whether to generate revenue by immediately selling them for a profit or by using them in the operations over a period of time, a price must be paid for them. The money being paid is what finances the asset.

This financing of assets can be done through to main sources. The first way to finance any asset is, of course, by paying through your own pocket. In corporate scenarios this is called capital or owner’s equity. The word capital represents the owner’s investment in the company. However, this amount is also known as share capital in limited liability companies. This is because both public and private limited companies issue stocks of shares which represent an ownership in the company. The owner’s liability is then limited to the amount being paid for the shares. However, in a sole proprietorship or a partnership, the liability is not only limited to the capital that the owners invested in the company in the first place but also the assets personally owned by them.

The second way to finance your asset is, of course, by borrowing. This is usually referred to as debt. Debt is basically a form of liability and signifies money that has been borrowed by the company for whatever reason they may deem necessary. In this case, we are assuming they are to finance some assets that they wish to acquire. This debt is borrowed from financial institutions and an interest is paid on the principle amount borrowed. Another form of trade debt is when the goods are borrowed directly from the suppliers with a promise to pay back in the future.

Since, these are the two common sources of finance, the summation of debt and equity would always equal the amount of ownership in assets that the company has a claim on. However, some experts argue that there is another third source of finance – a hybrid instrument. Preferred shares are the only form of finance to fall under this category and are differentiated from the common stock, which is also known as shareholders’ equity, because it carries characteristics of both debt and equity in it.

With experience as the sub-editor of a local magazine, Lizzie Blake, a graduate from UIC with majors in both Literature and Management, holds a lot of experience in custom theses writing.