Business finance resources can be studied under the following headings:
(1) Short Term Finance:
Short term financing is needed to meet today’s business needs. Current needs may include payment of taxes, salaries or wages, repair costs, payments to creditors, etc. Short-term financial needs arise because sales revenue and purchase payments are not always the same all the time. Sometimes sales can be low compared to purchases. Further sales can be made on credit while purchases are made in cash. So short-term finance is needed to offset this imbalance.
Short-term sources of finance are as follows:
(i) Bank Overdraft: Bank overdraft is widely used as a source of business financing. Under this the client can withdraw any amount over and above his original account balance. This makes it easier for entrepreneurs to meet short-term unexpected expenses.
(ii) Billing Discounts: Exchange invoices can be discounted at the bank. This gives the bill holder cash that can be used to finance urgent needs.
(iii) Advances from Customers: Advances are primarily requested and received for order confirmation, however they are also used as a source of operational financing required to carry out work orders.
(iv) Installment Purchases: Purchases in installments provide more time to make payments. Deferred payments are used as a source of financing for small expenses that must be paid immediately.
(v) Bill of Lading: Bills of lading and other export and import documents are used as collateral to take loans from banks and the loan amount can be used as financing for a short period of time.
(vi) Financial Institutions: Different financial institutions also help entrepreneurs out of financial difficulties by providing short term loans. Certain cooperatives can arrange short-term financial assistance for entrepreneurs.
(vii) Trade Credit: It is customary for entrepreneurs to purchase raw materials, store and spare parts on credit. The transaction resulted in an increase in trade payables that must be paid after a certain period of time. Goods are sold for cash and payment is made after 30, 60, or 90 days. This allows some freedom for entrepreneurs in the face of financial difficulties.
(2) Medium Term Finance:
This financing is required to meet the medium term (1-5 years) requirements of the business. Funding is basically needed for balancing, modernizing and replacing machines and plants. It is also necessary for organizational reengineering. They assist management in completing medium term capital projects within the planned time. The following are medium-term sources of finance:
(i) Commercial Banks: Commercial banks are the main source of medium-term finance. They provide loans for different maturities against the appropriate securities. On termination the terms of the loan can be renegotiated, if required.
(ii) Rent to Buy: Rent to buy means to buy in installments. This allows the business house to have the necessary items with payments to be made in the future in agreed installments. It goes without saying that some interest is always charged on the amount owed.
(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long term financing. Apart from providing financing, they also provide technical and managerial assistance in various matters.
(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as medium-term sources of finance. Debentures are acknowledgments of loans from companies. The duration can be at any time according to the agreement of the parties. Debt holders enjoy a fixed rate of return. Under the Islamic mode of financing, bonds have been replaced by TFC.
(v) Insurance Companies: Insurance companies have a large pool of funds contributed by their policyholders. Insurance companies provide loans and make investments from this pool. The loan is a medium-term source of financing for various businesses.
(3) Long Term Finance:
Long-term finance are those that are required permanently or for a period of more than five years. They are basically desirable to meet structural changes in business or for heavy modernization costs. AKDSEO merupakan agency digital marketing yang fokus melayani jasa Backlinks dan Link building website, termasuk di dalamnya Jasa Menaikkan DA ( Domain Authority), It is also necessary for starting a new business plan or for a long-term development project. Here are the sources:
(i) Equity Shares: This method is most widely used worldwide to raise long term finances. Equity shares are taken up by the public to generate the authorized capital of a large-scale business. Reed Manning, Spa & Salon Equity shareholders share the profits and losses of the business. This method is safe and secure, in the sense that the amount received is only paid back when the company is liquidated.
(ii) Retained Earnings: Retained Earnings are reserves generated from excess profits. In times of need they can be used to finance business projects. This is also called plowing back profits.
(iii) Leasing: Leasing is also a source of long-term financing. With the help of leasing, new equipment can be acquired without large cash outflows.
(iv) Financial Institutions: Different financial institutions such as former PICIC also provide long term loans for business houses.
(v) Debt Securities: Debt Securities and Certificates of Participation are also used as a source of long-term financing.
These are various sources of finance. There really isn’t a hard and fast rule for distinguishing between short and medium term sources or medium and long term sources. A source for example a commercial bank can provide short term or long term loans according to the client’s requirements. However, all of these resources are often used in the modern business world to raise finances.