The following headings can be used to examine sources of business finance:
(1) Short Term Finance
To meet the immediate business needs, short-term financing is necessary. Current needs could include paying taxes, wages or salaries, repairs, and payment to creditors. Because sales revenues and purchase payments do not always match, short-term finance is necessary. Sometimes sales are lower than purchases. Additional sales might be made on credit, while cash purchases may be possible. These disequilibriums may require short-term finance to meet them.
These are the sources of short-term finance:
(i). Bank OverdraftBank overdrafts are a very popular source of business financing. This allows the client to draw a certain amount of money above and beyond his account balance. It is much easier for a businessman to cover short-term unexpected expenses.
(iii) Bill DiscountingBanks can discount bills of exchange. This gives the bill holder cash that can be used for immediate financial needs.
(iii). Advances from Customers:Advances can be used to confirm orders. However, they can also be used to finance the operation necessary for executing the job order.
(iv). Installment Purchases Buying on installment allows for more time to pay. Deferred payments can be used to finance small expenses that are not payable immediately.
(v), Bill of LadingBill of Lading is used to guarantee that banks will lend you money. The loan amount can also be used for short-term finance.
(vi). Financial Institutions Different financial institutions offer short-term loans to help people in financial trouble. Some co-operative societies offer short-term financial assistance to businessmen.
(viii) Trade Credit:It’s a common practice for businessmen to purchase raw material, store, and spares using credit. These transactions increase the accounts payable to the business and are due to be paid within a specified time. Cash is used to purchase goods and payments are made after 30-60, 60, and 90 days. This gives businessmen some flexibility when they have to meet financial difficulties.
(2) Medium Term Finance:
This finance is necessary to meet the short-term (1-5 year) needs of the business. These funds are essential for the modernization, balancing and replacement of machinery and plants. They are also required for the re-engineering and maintenance of the company. These funds are used to help the management complete medium-term capital projects in the timeframe they have planned. These are some sources of medium-term finance:
(i). Commercial Banks:Commercial bank are the main source of medium-term finance. They offer loans with different terms and can be used to purchase securities. If necessary, the terms can be renegotiated.
(iii) Hire Purchase:Hire purchasing means that you buy in installments. This allows the company to purchase the goods they need with future installments. It is important to mention that interest is charged on any outstanding amounts.
(iii). Financial Institutions Several financial institutions, such as SME Bank and Industrial Development Bank, offer medium- and long-term financing. They provide financial services, as well as technical and managerial support on various matters.
(iv), Debentures, and TFCs: Debentures (Terms Finance Certificates), and TFCs (Terms Financial Certificates) can also be used to source medium-term finances. A debtor acknowledges that the company has borrowed money. The parties can agree on the duration of the debt. The return to the debenture holder is at a fixed interest rate. TFCs have replaced debentures in Islamic financing.
Insurance Companies (v)Insurance Companies have a large pool contributed by policyholders. This pool is used by insurance companies to make loans and investments. These loans provide medium-term financing for many businesses.
(3) Long Term Financing:
These are long term funds that are needed on a permanent basis for a longer period of time. These are needed to fund major business changes or heavy modernization costs. They are required to start a new business plan, or for long-term developmental projects. These are some of its sources:
(i), Equity Shares:This is the most popular method to raise long-term finance. To increase the capital base for a large-scale business, equity shares can be subscribed by the public. Equity share holders are entitled to share in the profits and losses of the business. This is a safe and secure method, as the amount received is not repaid until the company is wound up.
(iii) Retained Earnings Retained earning are the profits that are not used to pay for the business project. They can be used to fund the business project in times of financial need. This is also known as ploughing back profits.
Leasing (iii).Leasing can also be used to provide long-term financing. Leasing allows you to acquire new equipment without having to pay a lot of money.
(iv). Financial Institutions Different financial institutions, such as the former PICIC, also offer long-term loans to business houses.
(v), Debentures:Debentures, Participation Term Certificates can also be used to source long-term financing.
These are all different sources of finance. There is no way to tell the difference between short-term and medium-term sources, or between medium and long-term sources. For example, a commercial bank source can offer a short-term or long-term loan depending on the client’s needs. All of these sources can be used to raise funds in modern business.