## Financial Needs and Sources of Finance of a Business
### Financial Needs by Time Horizon
A business needs funds for different durations and purposes. These are classified by maturity:
| Category | Duration | Purpose |
|---|---|---|
| Long-term needs | More than 5–10 years | Plant, machinery, land, buildings, and permanent working capital. |
| Medium-term needs | 1 to 5 years | Stores, critical spares, tools, dies, moulds. |
| Short-term needs | Up to 1 year | Current assets — stock, debtors, cash (i.e., working capital). |
### Basic Principle of Funding (Matching/Hedging Principle)
Match the maturity of the source to the maturity of the need:
- Short-term needs → funded by short-term sources
- Medium-term needs → funded by medium-term sources
- Long-term needs → funded by long-term sources
> Using short-term sources to fund long-term assets creates rollover/refinancing risk; using long-term sources for short-term needs is costly and idle. The matching principle balances both.
### Funding by Business Stage and Risk
The appropriate source also depends on how much uncertainty the business carries at each stage:
| Stage | Uncertainty level | Typical sources of funds |
|---|---|---|
| Early stage | High uncertainty | Equity (Angel Investors) |
| High to moderate uncertainty | Equity, Venture Capital, Debt | |
| Growth stage | Moderate to low uncertainty | Debt, Venture Capital, Private Equity |
| Stable stage | Low uncertainty | Debt |
### Key takeaway
As uncertainty falls (early → stable), the firm can shift from risk-bearing equity toward cheaper debt, because lenders are willing to lend only once cash flows become predictable.