## Financial Needs and Sources of Finance

### Three Types of Financial Needs (Based on Duration)

Type	Duration	Purpose / Used For
Long-term	More than 5–10 years	Fixed assets: land, building, plant & machinery; permanent working capital
Medium-term	1 to 5 years	Critical spares, tools, dies, moulds, stores & spares
Short-term	Less than 1 year	Working capital: stock, debtors, cash (recurring, varies with business cycle)

### Basic Funding Principle

Match the duration of the need with the duration of the source:

Short-term needs → Short-term sources
Medium-term needs → Medium-term sources
Long-term needs → Long-term sources

### Funding Based on Stage of Business

Stage	Uncertainty Level	Appropriate Sources
Early Stage	High	Equity (mainly Angel Funds)
Growth Stage	High to Moderate → Moderate to Low	Equity, Venture Capital, Debt; Debt, VC, Private Equity
Stable Stage	Low	Debt

> As a business matures and uncertainty falls, it can access cheaper debt financing.

Worked example

### Example 1

A startup in Year 1 with high uncertainty raises ₹50 lakh from an angel investor in equity form. An established FMCG company in its stable phase raises ₹500 crore via bonds — illustrating the stage-based funding principle.

### Example 2

A manufacturer needs to buy tools and dies expected to last 3 years. Matching principle says this should be financed by a medium-term bank loan (not short-term overdraft and not 15-year bonds).

⚠️ Common exam mistakes

Financing long-term fixed assets with short-term funds — creates a maturity mismatch and liquidity crisis.
Thinking only equity is available for startups — angel funds and seed capital are forms of equity appropriate for early-stage funding.
Ignoring the matching principle — mismatched financing is a common cause of financial distress.

Reference:

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