## Procurement of Funds
The first basic aspect of financial management is raising the money the business needs. Funds can be drawn from many sources, and modern businesses even use innovative products (e.g., Carbon Credit Trading) to raise finance.
### Cost of Funds — the central trade-off
Every source of funds carries a different combination of risk, cost and control. The finance manager's goal is to keep the cost of funds at a minimum while balancing the risk and control implications.
### Major Sources of Funds
| Source | Cost | Risk / Repayment | Key point |
|---|---|---|---|
| Equity Shares | Usually expensive (high dividend expectations, no tax shield) | Low risk — no repayment except on liquidation | Risky for the cost reason, but safe because there is no fixed repayment obligation |
| Debentures | Cheaper than equity (interest is tax-deductible) | Risky — must repay principal and pay interest regardless of profit | Tax advantage makes them cheap, but fixed obligations create risk |
| Commercial Banks | Varies | Provide both short-term and long-term finance | Also support routine activities (deposits, payments) |
| International Funding | Varies | Via FDI, FII, and instruments like ADRs and GDRs | Globalization lets firms tap overseas markets |
| Angel Financing | Equity given up | Investors take equity ownership | For startups/expansions that don't qualify for bank loans or venture capital |
### Equity vs. Debt — the key insight
- Equity is costly but low risk (no compulsory repayment).
- Debt (debentures) is cheap (tax-deductible interest) but high risk (fixed interest + repayment whether or not the firm makes a profit).
### Key considerations
- Balance equity and debt to create an optimal funding (capital) structure.
- Keep the cost of funds as low as possible while managing risk and control effectively.