Sources of Business Finance


(1) Short Term Finance:

Short-term finance is needed to fulfill the current needs of the business. The present conditions may include paying taxes, salaries or wages, repair expenses, payment to creditors, etc. The need for short-term finance arises because sales revenues and purchase payments are not perfectly the same at all the time. Sometimes sales can be low as compared to purchases. Other deals may be on credit while purchases are on cash. So, short-term finance is needed to match this disequilibrium.

Sources of Business Finance 1

Sources of short term finance are as follows:

(i) Bank Overdraft: Bank overdraft is a very widely used source of business finance. Under this client can draw a certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet unexpected short-term expenses.

(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill, which can be used to finance immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as a 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 used to finance small expenses, which are to be paid immediately.

(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take a loan from banks, and that loan amount can be used as finance for a short time.

(vi) Financial Institutions: Different financial institutions also help business people to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short-term financial assistance for business people.

(vii) Trade Credit: It is the usual practice of businessmen to buy raw material, store, and spares on credit. Such transactions result in increasing accounts payable of the business, which are to be paid after a specific period. Goods are sold in cash, and payment is made after 30, 60, or 90 days. This allows some freedom to business people in meeting financial difficulties My Live Updates.

(2) Medium Term Finance:

This finance is required to meet the medium-term (1-5 years) requirements of the business. Such finances are required for the balancing, modernization, and replacement of machinery and plant. These are also needed for re-engineering of the organization. They aid the management in completing medium-term capital projects within planned time. Following are the sources of medium-term finance:

(i) Commercial Banks: Commercial banks are the primary source of medium-term finance. They provide loans for different time-period against appropriate securities. At the termination of terms, the loan can be re-negotiated if required.

(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to have the required goods with payments to be made in agreed installment. Needless to say that some interest is always charged on outstanding amounts.

(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance, they also provide technical and managerial assistance on different matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium-term finances. Debentures are an acknowledgment of a loan from the company. It can be of any duration as agreed among the parties. The debenture holder enjoys a return at a fixed rate of interest. Under the Islamic mode of financing, debentures have been replaced by TFCs.

(v) Insurance Companies: Insurance companies have a large pool of funds from their policyholders. Insurance companies grant loans and make investments out of this pool. Such loans are the source of medium-term financing for various businesses.