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Finance > Corporate Finance > Sources

Sources of finance

Companies depend upon two categories of capital to meet both their short-term and long-term requirements. These are:

Equity or Ownership capital is the initial or venture capital, invested by the shareholders or owners of the company. A cushion for all kinds of financial shocks, it takes the form of equity or preference shares. Equity holders are the final and residuary owners of the company. They shoulder the risk and are also entitled to all residual profits and net worth of the company. The extent of equity shares (authorised and paid up capital) can be increased or changed only as per the provisions of the Companies Act and by passing a resolution by the general body meeting of the shareholders of the company.

Debt or the creditorship capital includes bonds, debentures apart from term loans from financials institutions and banks. Owing to their nature of operations, FIs normally finance the long-term needs of the corporates and Banks grant funding for short-term needs. However, lately, the roles are getting juxtaposed with FIs making forays into short end of the debt market and Banks beginning to pursue the long end of the debt market. Lending by commercial banks and financial institutions are highly specialized fields, which demand skills not ordinarily available in the market.

The mix of equity and debt capitals in funding the requirements of a corporate, also known as Capital Structure is an important decision and should be taken after careful examination of all relevant factors.


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