Sources of Business Finance

Posted by Fallesen McLamb on May 20th, 2021

Sources of business finance could be studied under the following heads: (1) Short Term Finance: Short-term finance is required to match the current needs of business. The current needs can include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short-term finance arises because sales revenues and buy payments aren't perfectly same at all the time. Sometimes sales could be low as compared with purchases. Further sales may be on credit while purchases are on cash. So short-term finance is needed to match these disequilibrium. Sources of short term finance are the following: (i) Bank Overdraft: Bank overdraft is very widely used way to obtain business finance. Under this client can draw certain amount of cash over and above his original balance. Thus it is easier for the businessman to meet short term unexpected expenses. (ii) Bill Discounting: Bills of exchange could be discounted at the banks. This gives cash to the holder of the bill that can be used to finance immediate needs. (iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as way to obtain financing the operations necessary to execute the job order. (iv) Installment Purchases: Purchasing on installment gives additional time to make payments. The deferred payments are employed as a source of financing small expenses which are to be paid immediately. (v) Bill of Lading: Bill of lading and other export and import documents are employed as a warranty to take loan from banks and that loan amount can be utilized as finance for a short time period. (vi) FINANCE INSTITUTIONS: Different financial institutions also help businessmen to obtain out of financial difficulties by giving short-term loans. Certain co-operative societies can arrange short term financial assistance for businessmen. (vii) Trade Credit: It is the usual practice of the businessmen to get raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time frame. Goods can be purchased on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties. (2) Medium Term Finance: This finance must meet the medium term (1-5 years) requirements of the business. Such finances are basically necessary for the balancing, modernization and replacement of machinery and plant. They are also necessary for re-engineering of the business. They aid the management in completing medium term capital projects within planned time. Following are the sources of medium term finance: (i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for different time-period against appropriate securities. At the termination of terms the loan can be re-negotiated, if required. (ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to really have the required goods with payments to be produced in future in agreed installment. Obviously that some interest is always charged on outstanding amount. (iii) FINANCE INSTITUTIONS: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance in addition they provide technical and managerial assistance on different matters. (iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) may also be used as a way to obtain medium term finances. Debentures is an acknowledgement of loan from the business. It really is of any duration as agreed among the parties. The debenture holder enjoys return at a set interest. Under Islamic mode of financing debentures has been replaced by TFCs. (v) Insurance Companies: Insurance firms have a large pool of funds contributed by their policy holders. Insurance firms grant loans and commit using this pool. Such loans are the way to obtain medium term financing for various businesses. (3) Long Term Finance: Long term finances are the ones that are required on permanent basis or for a lot more than five years tenure. They're basically desired to meet structural changes in business or for heavy modernization expenses. These are also needed to initiate a new business plan or for a long term developmental projects. Following are its sources: (i) Equity Shares: This technique is most widely used around the globe to raise longterm finance. Equity shares are subscribed by public to generate the capital base of a big scale business. The equity share holders shares the profit and loss of the business. This technique is safe and secured, in a sense that amount once received is only paid back during wounding up of the company. (ii) Retained Earnings: Retained earnings will be the reserves which are generated from the surplus profits. In times of need they can be used to finance the business project. This is also known as ploughing back of profits. (iii) Leasing: Leasing is also a source of long term finance. Through the help of leasing, new equipment can be had without any heavy outflow of cash. (iv) FINANCE INSTITUTIONS: Different financial institutions such as former PICIC also provide longterm loans to business houses. (v) Debentures: Debentures and Participation Term Certificates are also used as a way to obtain long term financing.

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Fallesen McLamb

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Fallesen McLamb
Joined: May 19th, 2021
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