Options for Business Finance
Sources of business finance may be studied under the following heads:
(1) Short Term Finance:
Short-term finance is needed to fulfill the current needs of commercial. The current needs can include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The requirement for temporary finance arises because sales revenues and get payments are not perfectly same at all the time. Sometimes sales might be little as in comparison to purchases. Further sales could be on credit while purchases are on cash. So short term finance can be match these disequilibrium.
Reasons for temporary finance are the following:
(i) Bank Overdraft: Bank overdraft is extremely trusted supply of business finance. Under this client can draw certain sum of cash past his original account balance. Thus it is a lot easier for your businessman to meet short-run unexpected expenses.
(ii) Bill Discounting: Bills of exchange may be discounted in the banks. This supplies cash for the holder in the bill which can be used to advance immediate needs.
(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, kinds used as source of financing the operations necessary to execute the job order.
(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are employed as being a source of financing small expenses that are to get paid immediately.
(v) Bill of Lading: Bill of lading as well as other export and import documents are utilized as a guarantee to look at loan from banks which amount of the loan can be used as finance for any short time period.
(vi) Financial Institutions: Different loan companies also help businessmen to get out of financial difficulties by giving short-term loans. Certain co-operative societies can arrange short-run tax assistance for businessmen.
(vii) Trade Credit: It is the usual practice from the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable from the business which can be to become paid after a certain time frame. Merchandise is obsessed about cash and payment is manufactured after 30, 60, or Ninety days. This enables some freedom to businessmen in meeting financial hardships.
(2) Medium Term Finance:
This finance is required to meet the medium term (1-5 years) requirements from the business. Such money is basically necessary for the balancing, modernization and replacing of machinery and plant. Forms of essential for re-engineering with the organization. They aid the management in completing medium term capital projects within planned time. Following would be the sources of medium term finance:
(i) Commercial Banks: Commercial banks will be the major way to obtain medium term finance. They provide loans for different time-period against appropriate securities. With the termination of terms the money can be re-negotiated, if neccessary.
(ii) Hire Purchase: Hire purchase means buying on installments. It enables the organization house to achieve the required goods with payments to make in future in agreed installment. Of course that some interest rates are always charged on outstanding amount.
(iii) Finance institutions: Several finance institutions including SME Bank, Industrial Development Bank, etc., 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) can also be used as an origin of medium term finances. Debentures can be an acknowledgement of loan through the company. It is usually of the duration as agreed one of many parties. The debenture holder enjoys return at the fixed interest rate of great interest. Under Islamic mode of financing debentures has become replaced by TFCs.
(v) Insurance agencies: Insurance agencies have a large pool of funds contributed by their policy owners. Insurance providers grant loans and earn investments from this pool. Such loans are the method to obtain medium term financing for several businesses.
(3) Long lasting Finance:
Long-term finances are the ones that are essential on permanent basis or a lot more than 5 years tenure. These are basically planned to meet structural adjustments to business and for heavy modernization expenses. Forms of needed to initiate a new business strategy and for a lasting developmental projects. Following are its sources:
(i) Equity Shares: This technique is hottest around the globe to raise lasting finance. Equity shares are subscribed by public to get the funding base of a giant scale business. The equity share holders shares the gain and decrease of the business. Using this method is safe and secured, in a sense that amount once received is merely paid back during the time of wounding of the organization.
(ii) Retained Earnings: Retained earnings are the reserves which can be generated from the excess profits. In times of need they may be utilized to finance the business project. This can be called ploughing back of profits.
(iii) Leasing: Leasing can be another supply of long lasting finance. By making use of leasing, new equipment can be acquired with no heavy outflow of cash.
(iv) Banking institutions: Different finance institutions for example former PICIC offer long lasting loans to business houses.
(v) Debentures: Debentures and Participation Term Certificates can also be utilized as an origin of long term financing.
These are various reasons for finance. Actually there is absolutely no cast in stone rule to differentiate among short and medium term sources or medium and long lasting sources. A source for instance commercial bank can offer both a short term or even a long-term loan in line with the needs of client. However, every one of these sources are often employed in the modern world of business for raising finances.