Sources of business finance Could be studied under the following heads:
(1) Short Term Finance:
Short-term finance is required to meet the current needs of business. The current needs could include payment of taxes, salaries or salaries, repair costs, payment to creditor etc.. The demand for short term finance arises because sales earnings and purchase payments aren’t perfectly same at all of the time. Sometimes sales can be reduced when compared with purchases. Further sales might be on credit while buys are on money. So short term fund is necessary to match those disequilibrium.
Sources of short term fund are as follows:
(I) Bank Overdraft: Bank overdraft is quite popular source of business finance. Under this customer can draw certain amount of money over and above his original account balance. Thus it’s simpler for the businessman to fulfill short term unexpected expenses.
(ii) Bill Discounting: Bills of exchange could be discounted at the banks. This provides money to the holder of the invoice that may be used to fund immediate needs.
(iii) Advances from Customers: Advances are mostly demanded and obtained for the confirmation of orders But these can also be used as source of funding the operations required to execute the work order.
(iv) Installment Purchases: Purchasing on installation gives more time to make payments. The deferred payments serve as a source of funding small expenses that should be paid immediately.
(v) Bill of Lading: Bill of lading and other export and import files act as a promise to take loan from banks and that loan amount may be utilised as finance for a brief period of time.
(vi) Financial Institutions: Different financial institutions also help businessmen to get out of financial difficulties by giving short-term loans. Certain co-operative societies can organize short term financial assistance for businessmen.
(vii) Trade Credit: it’s the typical practice of the businessmen to purchase raw material, shop and spares on credit. Such trades result in increasing accounts receivable of the business which should be paid after a certain period of time. Goods are sold on money and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in fulfilling financial difficulties.
(2) Medium Term Finance:
This finance must meet with the medium term (1-5 years) requirements of the enterprise. Such finances are essentially required for the balancing, modernization and replacement of plant and machines. These are also necessary for re-engineering of their organization. They aid the direction in finishing medium term funding projects within planned time. Following are the resources of medium term finance:
(I) Commercial Banks: Commercial banks are the primary source of medium term fund. They supply loans for distinct time-period against proper securities. At the conclusion of conditions the loan can be re-negotiated, if needed.
(ii) Hire Purchase: Hire purchase means purchasing on installments. It allows the company house to have the essential goods with payments to be made in future in agreed installment. Obviously that a interest is always charged on outstanding volume.
(iii) Financial Institutions: Many financial institutions like SME Bank, Industrial Development Bank, etc., also offer medium and long-term financing. Besides supplying finance they also offer technical and technical assistance on various matters.
(iv) Debentures and TFCs: Debentures and TFCs (Conditions Finance Certificates) can also be used as a source of medium term financing. Debentures is an acknowledgement of loan by the business. It can be of any length as agreed among the parties. The debenture holder enjoys return at a fixed interest rate. Under Islamic mode of financing debentures was substituted by TFCs.
(v) Insurance Companies: Insurance companies have a huge pool of funds contributed by their policy holders. Insurance companies grant loans and make investments from this pool. Such loans are the source of medium term funding for a variety of businesses.
(3) Long Term Finance:
Long term finances are the ones which are required on permanent basis or for more than five years tenure. They are essentially desired to fulfill structural changes in business or for heavy modernization expenses. These are also required to initiate a new business plan or for a long term developmental projects. Following are its resources:
(I) Equity Shares: This procedure is most widely used throughout the world to increase long term finance. Equity stocks are payable by people to make the capital base of a large scale enterprise. The equity share holders shares the gain and loss of the organization. This approach is safe and secured, in ways that amount after received is only repaid in the time of wounding from the business.
(ii) Retained Earnings: Retained earnings are the reservations that are generated from the extra profits. In times of need they may be used to fund the company project. This is also called ploughing back of profits.
(iii) Leasing: Leasing is also a source of long term finance. With the assistance of leasing, new equipment can be acquired with no heavy outflow of money.
(iv) Financial Institutions: Different financial institutions such as former PICIC also offer long term loans to business houses.
(v) Debentures: Debentures and Participation Term Certificates can also be used as a source of long term financing.
These are numerous sources of finance. The truth is there isn’t any hard and fast rule to distinguish among medium and short term sources or moderate and long term sources. A source such as commercial lender can supply both a short term or a long term loan in line with the requirements of client. However, these sources are often utilised in today’s business world for raising financing.