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Answer 1

$\rm \ \huge Sources \: of \: Finance \:$

1. Retained earnings :

A portion of net earnings may be retained in business for future use. This is known as Retained earnings. It is also known Ploughing back of profits.

Merits :

• It is the permanent source of fund

• It does not involve any explicit cost like interst, divident etc

• It enhances the capacity to absorb losses in firm

• Greater degree of operational freedom and flexibility.

Demerits :

• May cause dissatisfication among share holders.

• Uncertain source of funds

• Profits are fluctuating in this type of fund.

2. Trade Credit :

Trade credit is a credit extended from one trader to another for purchase of goods and services. Trade credit facilitates the Purchase of supplies without immediate payment.

Merits :

• Trade credit is a convenient and continuous source of fund.

• It promote sales of a organisation.

• It does not charge any fees on Assets

• It is also used as to increase the inventory level.

Demerits :

• Only limited amount can raise through this funds.

• It is a costly source of fund.

• May cause firms in indulge in overtrading.

3. Factoring :

Factoring is a financial service under which factor renders services including discount of bills , provides information about credit worthiness. There are 2 methods of factoring : Recourse and Non-recourse.

Merits :

• It is cheaper source of funds

• It is flexible

• It does not create any charge on assets.

• Factor provides security for a debt that firm unable to obtain.

Demerits :

• It is expensive when invoices are numerous.

• Factor may not feel comfortable while dealing with bad debts.

4. Lease Financing :

Lease Financing means that the owner the assets of a firm grants to other party the right to use the assets by a contractual agreement.

Merits :

• It enable the lesse to acquire the asset with lower investment.

• The simple documentation makes it a easier process.

• It privide finance without diluting the ownership.

• The agreement doesn't affect the debt raising capacity of a firm.

Demerits :

• The lesse never become the owner of the asset

• Impose certain restrictions on the use of Assets.

5. Public Deposits :

Public Deposits are the deposits that are raised by organizations directly from public is known as Public Deposits.

Merits :

• It has a simple procedure and does not contain restrictions

• Cost of public Deposits are lower than others

• It does not create any charge on assets

Demerits :

• Collection of public Deposits may difficult

• New companies generally find it difficult to raise fund through Public Deposits.

• It is unreliable source of finance.

The other sources of finance are :

• Commercial Paper

• Financial Institutions

• Debentures

• Issue of shares

• Commercial Banks.