Question

Entrepreneurs in order to finance their ventures rely on different sources of capital. Generally, sources of capital are divided into ‘debt or equity’ and ‘internal or external’. Critically, discuss this scenario.

Answer 1

There are many sources of Finance, but most of them revolve around Debt & Equity.

These Debts & Equities can be from internal or can be from external sources:

Internal Sources of finance comprises of owners investments, retained earnings, sale of stocks to the internal peoples of the company, etc.

External sources of Finance includes funds from outside of the company. there are many ways to do this firms can issue bonds and fund frrom debt or it can go for issue of shares to the public.

So, the main sources of capital are debts & equities.

Debt Financing & its impact on the firm: Financing from debts means issuing bonds or taking long term loans and doing business, which increases the liabilities in the balacesheet of the company. Issuing excess debts can have a negative impact on the working capital of the company because firm has to pay interest on the debts and it reduces the working capital of the company.

Equity Financing and its impacts on the firm: Equity financing means issuing shares of the company for the publicor for the internal peoples of the company. In finance it is also known as diluting the rights of the promoters of the company. there is a negative thing that as we issue equity shares the % share of the promoters of the company declines menas they are having less rights now as compared to earlier.

The positive side is that we are not obliged to pay dividends to the share holders of the company every year. If we have future plans of expansion we can use that earnings and can pay dividends next year.

So, these are the critical scenario of sources of capital as asked in the question.