Sources of Business Finance can be studied beneath the following heads:
(1) Short-Term Finance:
Short-term Business finance is needed to fulfill the modern-day wants of business. The current wishes may also encompass price of taxes, salaries or wages, repair expenses, the fee to the creditor, etc. The need for short period finance arises because income revenues and buy payments are no longer flawlessly identical at all the time. Sometimes income can be low as compared to purchases. Further sales can also be on deposit while investments are on cash. So quick term finance is needed to in shape this disequilibrium.
Sources of short period finance are as follows:
(I) Bank Overdraft: Bank overdraft is very broadly used a source of commercial enterprise finance. Under this consumer can draw a certain sum of money over and above his original account balance. Thus it is simpler for the businessman to meet quick period unexpected expenses.
(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides money to the holder of the invoice which can be used to finance immediate needs.
(iii) Advances from Customers: Advances are in particular demanded and received for the confirmation of orders, however; these are additionally used as a source of financing the operations essential to execute the job order.
(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred amounts are used as a source of financing small fees which are to be paid immediately.
(v) Bill of Lading: Bill of lading and other export and import files are used as a warranty to take a mortgage from banks, and that mortgage quantity can be used as finance for a short period.
(vi) Financial Institutions: Different economic institutions also help people in business to get out of financial difficulties by using presenting temporary loans. Certain co-operative societies can organize short-term economic help for people in business.
(vii) Trade Credit: It is the regular practice of the businessmen to buy uncooked material, keep and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain period. Goods are offered on money and payment is made after 30, 60, or ninety days. This permits some freedom to people in business in meeting financial difficulties.
(2) Medium Term Finance:
This finance is required to meet the medium term (1-5 years) requirements of the business. Such finances are essentially required for the balancing, modernization, and substitute of machinery and plant. These are additionally needed for re-engineering of the organization. They aid the management in completing medium-term capital initiatives inside predetermined time. Following are the sources of medium-term finance:
(i) Commercial Banks: Commercial banks are the primary supply of medium period finance. They provide loans for distinct time-period in opposition to relevant securities. At the termination of phrases, the mortgage can be re-negotiated, if required.
(ii) Hire Purchase: Hire buys ability shopping for on installments. It lets in the enterprise residence to have the required items with payments to be made in future in agreed installment. Needless to say that some interest is always charged on the unusual amount.
(iii) Financial Institutions: Several financial establishments such as SME Bank, Industrial Development Bank, etc., additionally supply medium and long-term finances. Besides offering finance, they also furnish technical and managerial assistance on special matters.
(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium period finances. A debenture is an acknowledgment of loan from the company. It can be of any period as agreed amongst the parties. The debenture holder enjoys return at a constant rate of interest. Under the Islamic mode of financing, debentures have been changed via TFCs.
(v) Insurance Companies: Insurance corporations have a large pool of cash contributed via their policyholders. Insurance companies supply loans and make investments out of this pool. Such loans are the source of medium period financing for some businesses.
(3) Long-Term Finance:
Longtime period finances are these that are required on a permanent basis or for extra than five years tenure. They are preferred to meet structural modifications in business or for heavy modernization expenses. These are also wished to initiate a new business diagram or for a long-term developmental projects. Following are its sources:
(i) Equity Shares: This technique is most broadly used all over the world to raise long period finance. Equity shares are subscribed with the aid of the public to generate the capital base of large-scale business. The fairness shareholders share the income and loss of the company. This approach is secure and secured, in an experience that amount as soon as acquired is solely paid returned at the time of wounding up of the company.
(ii) Retained Earnings: Retained earnings are the reserves which are generated from the excess profits. In instances of want, they can be used to finance the business project. This is also known as plowing back of benefits.
(iii) Leasing: Leasing is also a supply of long-term finance. With the help of tenancy, new equipment can be obtained without any massive outflow of cash.
(iv) Financial Institutions: Different financial establishments such as former PICIC also grant long period loans to enterprise houses.
- v) Debentures: Debentures and Participation Term Certificates are additionally used as a supply of extended period financing.
Conclusion: These are some sources of finance. In reality, there is no hard and fast rule to differentiate among short and medium-term sources or medium and lengthy term sources. A supply for example industrial bank can provide both a quick period and a long period loan according to the wants of the client. However, all these sources are regularly used in the current enterprise world for raising finances.