Business finance sources can be examined under the following headings:
(1) Short Term Finance:
A short-term loan is required to meet the needs of businesses. These needs could include paying tax, wages, or salary repairs, payments to a creditor, etc. The need for short-term financing is due to the fact that sales revenue and purchase installments are not exactly the same all the time. Sometimes, sales are low when compared to purchases. Other sales could be made in credit, while purchases may be made with cash. Thus, short-term finance is required to accommodate the disequilibrium.
The sources of short-term financing are:
(i) Banking OverdraftBank Overdraft is a extensively used as a source of financing for businesses. In this type of arrangement, a client is able to take out a certain amount of money in excess of the balance of his account. This makes it more convenient for businessmen to pay for short-term, unexpected costs.
(ii) bill discountingBills that are exchangeable can be discounted at banks. This gives cash to the person who holds the bill that can be used to pay for the immediate requirements.
(iii) Credits received from customers:Advances are primarily demanded and are received to confirm the receipt of orders. However, they can also be used to fund the cost of funding the operation needed for the execution of the job.
(iv) Installation PurchasesPurchasing in installments gives an additional time to make payments. The deferred payment is utilized for financing expenses of a small amount that are to be paid for immediately.
(v) Bill of Lading:Bill of lading as well as other import and export documents serve as a security to obtain credit from banks. This the loan amount may be used to finance an indefinite period of time.
(vi) Financial InstitutionsDifferent banks also assist businessmen to overcome of financial difficulties through short-term loans. Certain cooperative societies are able to provide temporary financial assistance to business owners.
(vii) Commerce CreditIt is the normal procedure for businessmen to purchase raw materials as well as store and spares with credit. This can result in an increase in accounts payable for the company that are due within a specific time. The goods are sold in cash and the payment is due within 30, 60, or even 90 days. This gives some flexibility to businesses to meet financial problems.
(2) Medium Term Finance:
This type of finance is necessary to meet the medium-term (1-5 years) needs of the company. The funds are used to balance, modernize and replacement of equipment and plants. These funds are also essential to re-engineer the company. They assist the management in completing medium-term capital projects in the timeframe that is planned. The following are sources of medium-term financing:
(i) Commercial BanksCommercial banking institutions are the primary source of medium-term financing. They can provide loans for a range of periods of time against the right securities. After the term expires, the loan may be renegotiated should it be required.
(ii) hire purchase:Hire purchasing means to purchase through installments. This allows the business to acquire the goods needed and the payment to be made at a later date in installments agreed upon. Naturally, some interest is charged for each the outstanding balance.
(iii) Financial InstitutionsSeveral banks, such as SME Bank, Industrial Development Bank and others. Also, they provide medium – and long-term financing. Apart from providing financial services, they offer managerial and technical assistance regarding various issues.
(iv) Debentures as well as TFCsDebentures as well as TFCs (Terms Finance Certificates) can also be utilized to fund short-term financials. Debentures are an acknowledgement of loan from the business. They can be any duration that is agreed between the parties. The holder of the debenture gets a returns at a fixed amount of interest. Under the Islamic method of financing, debentures have been replaced by TFCs.
(v) Insurance Companies:Insurance companies have a vast pool of money contributed by policy holders. Insurance companies offer loans and invest from the pool. These loans are the main source of long-term financing for various companies.
(3) Long Term Finance: payroll services
Long-term finances are those that are needed on a permanent basis, or for more than five years of tenure. They are typically required to accommodate any structural changes or to pay for large modernization expenses. They are also required for the creation of the development of a new business plan, or for long-term development project. These are the sources for it:
(i) Equity shares:This technique is popular all over the globe to raise long-term financing. Equity shares are purchased by the people to form the capital base of a massive company. Equity share holders share the profits and losses of the company. This method is secure and secure in the sense that once the money is received, it is only repaid when the company is wounding up of the business.
(ii) Retained Earnings The retained earnings constitute reserves that are derived from profits in excess. When needed, they could be used to finance a business plan. This is also known as the ploughing back of profits.
(iii) Letting:Leasing is also a source of long-term finance. By leasingnew machines is able to be purchased without a huge cash flow.
(iv) Financial InstitutionsDifferent banks, such as the former PICIC also offer long-term loans to business houses.
(v) DebenturesDebentures as well as Participation Terms Certificates are also utilized for long-term financing.
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