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Module 3- Topic 4

The document outlines various sources of funds for business operations, including retained earnings, debt capital, and equity capital. It emphasizes the importance of maintaining an optimal capital structure and compares the loan requirements of different bank and non-bank institutions. Additionally, it discusses alternative funding sources such as private equity, venture capital, and crowdfunding.

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ASHLEY NICOLE DELA VEGA
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4 views

Module 3- Topic 4

The document outlines various sources of funds for business operations, including retained earnings, debt capital, and equity capital. It emphasizes the importance of maintaining an optimal capital structure and compares the loan requirements of different bank and non-bank institutions. Additionally, it discusses alternative funding sources such as private equity, venture capital, and crowdfunding.

Uploaded by

ASHLEY NICOLE DELA VEGA
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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PRINTABLE LEARNING MATERIAL

Module 3- Topic4: Sources of Funds for Business Operations

LEARNING OUTCOME:
Cite bank and nonbank institutions in the locality that would serve as possible sources
of funds for business operations and compare and contrast the loan requirements of the
different bank and non-bank institutions. (ABM_BF12-IIIe-f-13-14)

The management aimed a financial decision is about to maintain an optimum capital


structure, for example, a proper mix of debt and equity, to ensure the trade-off between
the risk and return to the shareholders.

What are Sources of Funding?

Companies always seek sources of funding to grow the business. Funding, also called
financing, represents an act of contributing resources to finance a program, project, or a
need. Funding can be initiated for either short-term or long-term purposes.

(Lifted from: https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/)

Retained Earnings

Businesses aim to maximize profits by selling a product or rendering service for a price
higher than what it costs them to produce the goods. It is the most primitive source of
funding for any company.
After generating profits, a company decides what to do with the earned capital and how
to allocate it efficiently. The retained earnings can be distributed to shareholders as
dividends, or the company can reduce the number of shares outstanding by initiating a
stock repurchase campaign. (Lifted
from:https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/)

Debt Capital

Companies obtain debt financing privately through bank loans. They can also source
new funds by issuing debt to the public.

In debt financing, the issuer (borrower) issues debt securities, such as corporate bonds
or promissory notes. Debt issues also include debentures, leases, and mortgages.

Companies that initiate debt issues are borrowers because they exchange securities for
cash needed to perform certain activities. The companies will be then repaying the debt
(principal and interest) according to the specified debt repayment schedule and
contracts underlying the issued debt securities.

The drawback of borrowing money through debt is that borrowers need to make interest
payments, as well as principal repayments, on time. Failure to do so may lead the
borrower to default or bankruptcy. (Lifted from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/)

(Lifted from: https://efinancemanagement.com/sources-of-finance/debt-financing)


Equity Capital

Companies can raise funds from the public in exchange for a proportionate ownership
stake in the company in the form of shares issued to investors who become
shareholders after purchasing the shares.

Alternatively, private equity financing can be


an option, provided there are entities o
individuals in the company’s or directors’
network ready to invest in a project or wherever
the money is needed for.

Compared to debt capital funding, equity


funding does not require making interest
payments to a borrower. However, one disadvantage of equity capital funding is sharing
profits among all shareholders in the long term. More importantly, shareholders dilute a
company’s ownership control as long as it sells more shares. (Lifted from:
https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/)

Other Funding Sources

Funding sources also include private equity, venture capital, donations, grants, and
subsidies that do not have a direct requirement for return on investment (ROI), except
for private equity and venture capital. They are also called “crowdfunding” or “soft
funding.”

Crowdfunding represents the process of raising funds to fulfill a certain project or


undertake a venture by obtaining small amounts of money from a large number of
individuals. (Lifted from: https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/)

Licensing & Attributions / References


 Guichet.lu.(2018). Retrieved January 4, 2021, from https://guichet.public.lu/en/entreprises/financement-
aides/financement/apercu-general/differentes-sources-financement.html
 CFI Education Inc. (n.d.) Retrieved December 14, 2020, from
https://corporatefinanceinstitute.com/resources/knowledge/finance/sources-of-funding/

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