Sources of finance: special features

To run their business activities organizations use different types of funding sources. They can be divided into internal and external. Internal sources of financing are usually related to some types of resources generated in the course of economic activity, such as accumulated retained earnings, profits from operations, depreciation and others. Regarding he external forms of finance we can name such kinds as "receiving a grant of financial assistance from budgetary and extra-budgetary sources, the involvement of bank and non-bank loans, etc." According to another classification external sources of financing include "funds raised in the financial market, and received in the order of distribution (for example, insurance compensation for risks, dividends and interest on securities of other issuers). «

A large proportion of funding for small and medium-sized businesses is related to internal sources. For example, in the United States retained earnings are often used as means of financing for working capital(58 %) and capital expenditures(47%). It is important to note that the retained earnings as a source of working capital financing is most important for companies whose assets are up to 100 thousand $ and to finance capital investments retained earnings is mainly used by organizations with assets of more than 1 million $. In the Russian Federation retained earnings is the main domestic source of funding for the company (61.3% in 2012. The second largest source are personal savings of the organizations or funds earned in other firms (29.7%). In the third place are bank loans (15.8%).. (See Fig. 1) Bank loans is one of the most popular sources of funding, but not the most accessible due to the rather strict conditions for consideration of applications for loans and that’s why it is on the 3rd place. Organizations are likely to finance its activities from their own profits because it is easier and cheaper if they have this opportunity. The SME organizations that just entering the market have roughly the same structure of funding. The first exception are retained earnings that are not included in the source of finance.On the first place there are savings and property of owners and the second - loans of friends and family.

External sources of funding can be classified according to different criteria. One of them is the formalization of the relationship between the lender and the borrower. In this case, the forms of external financing include: bank loans, advances to factoring, leasing companies. Informal sources of funding include loans from friends and the owner or owners of the business,personal loans. The percentage of informal sources are much more used by newly created companies than those that have already passed the initial period of its activity.

Formal sources of external funding is usually divided into two types: loans, ie the use of leverage and corporatization, ie assignment of share of capital. According to foreign researches capital structure of the enterprise depends more on the financial system prevailing in the country, from its traditions and culture than on the characteristics of the organization, which include size, profitability, activity, period of existence. In Western literature there are two types of financial systems: based on the activities of banks and based on the financial markets. In the first system banks play a crucial role in the financing (Germany and France). While and in the second system in a competitive environment the most developed forms of financing are the issuance of shares and bonds (UK, USA). For the Russian Federation the common system of financing of SME is obtaining bank loans. Corporatization as a form raising funds at current stage of development of our country is only available for very large companies, which often are composed of foreign capital. The more detailed information on lending to small and medium-sized enterprises will be showed in the next chapter.

Thus, all the sources of financing SMEs can be divided into internal and external. The sources related to internal funds are generated in the course of economic activity. In turn, the external forms of financing can be divided into formal and informal. Informal sources typically include personal savings of founders and participants, as well as help from relatives, friends and acquaintances. The structure of formal sources consists credit and corporatization.In foreign countries as well as in Russia, the largest share in the financing of business development for small and medium-sized enterprises have retained earnings and personal resources of the founders and participants, ie. domestic sources of financing.

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