What is the source of investments?

A start-up business requires high investment along with its objectives, vision, mission, and business plan for the growth of the business. Investment is highly required for funding assets, working capital, and other operations of the business. An investment fund can be raised from various sources. Investment sources assist businesses to achieve their financial goals and support businesses to sustain and grow. Investors are willing to invest in businesses if adequate returns are entitled from the investments. Portfolio methods and risk evaluating measurements are utilized by investors to identify the best investment option.

What are the types of investment sources?

Investment funds can be acquired through various sources. Business organizations are widely using personal contributions, issuance of securities, debentures, loans, accepting deposits from the public, government grants, overdrafts from banks, and venture capital methods to raise investment amounts. The following are the different sources of investments:

Personal investment

Personal investment is the amount of contribution made by the owner or partner of the business. It is the capital of the business in which the owner contributes money based on his/her capacity and business requirement. Personal investments are mostly used in partnership and proprietorship businesses.

Issue of securities

Securities are the main source of investment for the entity. Securities form part of the capital of the entity. The securities are issued for cash and they carry an annual fixed dividend rate. Investment portfolio methods influence investors to invest in high return investments. Issuance of securities is the best option to acquire funds and investing in securities is the best option to earn a high income. Securities are classified into equity shares and preference shares.

Equity share capital

Equity shares are ordinary shares that require a fixed percentage dividend income on an annual basis. Equity shareholders have a residual interest in the asset of the business and they are enjoying the benefit of ownership. Equity shareholders have the right to vote on business decisions that are discussed in the general meeting of the company. Security holders are not entitled to receive dividends when the company is facing financial distress. They are entitled to receive dividends only when the company has an income.

Preference share capital

Preference shareholders are similar to equity holders, but preference shareholders do not have a residual interest in the company. They don’t have voting rights and they cannot attend the general meeting. Preference holders are not getting dividends when the company does not have profits. Preference shareholders have preferential rights in the assets of the company at the time of liquidation.

Debentures

Debentures are another important source of investment. A debenture is a long-term debt that provides fixed interest payments to investors. Debentures provide the option of converting debentures into shares and non-conversion. Debentures are mandatorily required to redeem at the maturity period when a non-conversion option is chosen by the debenture holder. Investors in debentures can choose whether to convert into shares or to redeem at the maturity period.

Loans and advances

Banks and financial institutions provide loans and advances. Loans and advances are classified as long-term loans and short-term loans based on the maturity periods. Long-term debt’s maturity period is more than 12 months, whereas the maturity period of short-term loans is less than 12 months. Loans and advances carry a fixed interest payment on a monthly, quarterly, half-yearly, or yearly basis. These loans and advances should settle at maturity.

Government grants

The government provides various financial assistance to individuals and entrepreneurs, including small business owners, in the form of grants. If the business is eligible to get a grant, it should apply for government grants. Government grants are very helpful for industries, unemployment areas, and small businesses as it does not require repayments. The issue of government grants is restricted to eligible businesses such as transportation, energy, and agricultural activities.

Deposits from pubic

Most of the companies are allowed to receive deposits from the public. Public deposit is considered a short-term investment source. The maturity period of public deposits ranges from 6 months to 3 years. In public deposits, investors are the general public investing in public deposits to earn high rates of return. Public deposit is a better choice for short-term financing.

Venture capital

Venture capital is one of the investment sources in which venture investors provide investment funds for startups and growing businesses. Investors are investing venture capital based on the assumption that the business will grow continuously and be long-lasting. These investors not only invest dollars but also assist the business in operations by providing business plans. Venture capitalists are called angel investors. They make investments after analyzing the business plan and strategies of the business entity.

Advantages of investment sources

Acquiring investment funds from different sources will help business owners to develop and expand their business. The following are the advantages of investment sources:

High investment amount can be obtained

Huge amounts of funds can be raised through securities and loans from banks and financial institutions. Banks and financial institutions offer a high amount of funds at a single payment.

Repayment is not required for government grants

Government grants do not require repayments, but it is restricted to eligible businesses. The government provides grants to small businesses, transportation, energy, and agricultural activities to encourage them.

Helps to expand the business

Investment sources help the entity to expand its business. It helps them acquire new assets, invest in working capital, expand operations and develop the business. Investment sources guide business organizations to grow.

Disadvantages of investment sources

The following are the disadvantages of investment sources:

High borrowing cost

Loans and advances are associated with fixed interest rates that the borrower should pay on a monthly or annual basis as per the loan agreement. In addition to the interest cost, loans and borrowings involve other costs such as processing fees, service fees, and maintenance fees.

Loss of control

When the entity issues securities or shares, investors who purchase the shares become the owners of the entity. Significant ownership in the entity gives them the power to control the board of the entity and they can influence management decisions.

Government grants are available only to eligible business

Government grants are available only to businesses that meet eligibility conditions. Even though government grants do not require repayments, they restrict the usage of funds. Small businesses, transportation, energy, and agricultural activities are eligible to claim government grants.

Context and applications

This topic is significant in general studies, professional exams, and also for both undergraduate courses and postgraduate courses and competitive exams, especially for

• Bachelors in Business Administration (Finance)
• Masters in Business Administration (Finance)
• Masters in Business Administration (Investment Management)

Practical problems

Question 1: What are the sources of investments?

   a) Securities

   b) Debentures

   c) All of the above

Answer: Option (c) is correct.

Explanation: Securities and debentures are the investment sources. Securities are issued to obtain huge investment funds. Dividends need to pay security holders if the entity earns a profit. Debentures are long-term capital debt. Fixed-rate of interest is charged by investors on debentures.

Question 2: Investors are using______________ technique to invest into various funds.

   a) Portfolio investment

   b) Ratio analysis

   c) All of the above

Answer: Option (a) is correct.

Explanation: Investors are using portfolio investment methods to invest in various funds. The portfolio technique is used to analyze the return from investments. And help investors to identify the best investment option based on the returns.

Question 3: Loans and advances are classified into________________.

   a) Long-term loans and advances

   b) Short-term loans and advances

   c) All of the above

Answer: Option (c) is correct.

Explanation: Loans and advances are classified into long-term and short-term. Long-term debt’s maturity period is more than 12 months, whereas the maturity period of short-term loans is less than 12 months.

Question 4: What are the advantages of venture capital?

   a) It ensures the growth of the business

   b) It helps to raise funds for business

   c) All of the above

Answer: Option (c) is correct.

Explanation: Venture capital is an investing method in which investors provide funds to the startup business and grow a business based on the assumption that the business will grow continuously. It helps to expand the business and ensures the growth of the business. It also assists the business to raise funds from various sources.

Question 5: Fixed rate of interest is charged on___________.

   a) Securities

   b) Debentures

   c) Preference share capital

Answer: Option (b) is correct.

Explanation: Fixed rate of interest is charged on debentures and borrowings. Interest is charged monthly, quarterly, half-yearly, or annually. Debenture requires compulsory redemption on the maturity period if the investor does not opt for conversion.