SOURCES OF CAPITAL
Company is association of a people or institution or group of associations which form a single unit to carry out its main objective. Such main objective needs factors of production like land, labour, capital and enterpreneur. All these factors are dependent on one another. E.g. In order to acquire land, labour and enterpreneur, we want capital. Thus capital becomes vital factor of production. Like wise, in order to acquire capital, land and enterpreneur, we want labour and so on. Among these four factors of production, let us discuss about the capital.
Capital means produced means of production. Capital is second most vital factors of production after enterpreneur. An entrepreneur unites land, labour and capital to achieve its target. In order to do so, company needs finance. Finance is necessary for expansion and development of the business, purchase of assets, etc. These requires huge capital investment which is not possible for a single or a group of people to finance. Therefore, it is entrepreneur who has innovated different ways of raising funds/finance/capital for the company.
There are two sources of finance- External Sources and Internal Sources.
Proposed dividend, provision for depreciation, provision for taxation, Retained profit are the internal sources of finance to the company.
In case of external sources of finance, capital can be raised mainly by issuing shares and debentures to the investors. Share capitals are nothing but the 'owned capital' of the company. On the other hand, debentures are the 'borrowed capital', which is raised by the company for some specific purposes. Hence here comes the difference between shares and debentures :-
1. The shareholders are the owners of the company and debenture holders are the creditors of the company.
2. Debentures have a fixed rate of interest. Whatever be the financial condition of the company, the debenture holders get their interests regularly. Therefore, at the time of liquidation of the company also, the debenture holders and creditors are paid off first and then the shareholders's interests are met.
Other than debentures, there are also some other sources of borrowed capital like Loans from Financial Institutions(IFCI,SFCs,IDBI,NIDC,ICICI,etc) and other Medium or short term sources(Lease financing, hire purchase,bill of exchange, public deposits,etc).