(1) Temporary Finance:
Short-term finance is necessary to match the current needs of economic. The current needs can include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and purchase payments usually are not perfectly same at the time. Sometimes sales may be low as compared to purchases. Further sales may be on credit while purchases are saved to cash. So short term finance is necessary to match these disequilibrium.
Options for short-term finance are listed below:
(i) Bank Overdraft: Bank overdraft is very trusted method to obtain business finance. Under this client can draw certain amount of money in addition to his original balance. As a result it is a lot easier for that businessman to satisfy short-term unexpected expenses.
(ii) Bill Discounting: Bills of exchange might be discounted in the banks. This allows cash to the holder from the bill which you can use to invest in immediate needs.
(iii) Advances from Customers: Advances are primarily demanded and received to the confirmation of orders However, these are also utilized as source of financing the operations essential to execute the work order.
(iv) Installment Purchases: Purchasing on installment gives added time to generate payments. The deferred payments are employed as being a method to obtain financing small expenses that happen to be being paid immediately.
(v) Bill of Lading: Bill of lading along with other export and import documents are utilized as being a guarantee to take loan from banks knowning that amount you borrow bring finance for the short period of time period.
(vi) Financial Institutions: Different banking institutions also assist businessmen to get out of financial difficulties through providing short-term loans. Certain co-operative societies can arrange short-run financial aid for businessmen.
(vii) Trade Credit: It is the usual practice of the businessmen to purchase raw material, store and spares on credit. Such transactions lead to increasing accounts payable in the business which can be to become paid from a certain period of time. Goods are sold on cash and payment is created after 30, 60, or 90 days. This allows some freedom to businessmen in meeting poverty.
(2) Medium Term Finance:
This finance must match the medium term (1-5 years) requirements from the business. Such prices are basically needed for the balancing, modernization and replacing machinery and plant. Forms of necessary for re-engineering of the organization. They aid the management in completing medium term capital projects within planned time. Following will be the causes of medium term finance:
(i) Commercial Banks: Commercial banks include the major supply of medium term finance. They offer loans for different time-period against appropriate securities. In the termination of terms the loan can be re-negotiated, if required.
(ii) Hire Purchase: Hire purchase means buying on installments. It helps the business enterprise house to offer the required goods with payments to be made later on in agreed installment. Naturally that some interest is always charged on outstanding amount.
(iii) Financial 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) are also utilized as a source of medium term finances. Debentures is definitely an acknowledgement of loan through the company. It can be of any duration as agreed one of the parties. The debenture holder enjoys return with a fixed interest rate of great interest. Under Islamic mode of financing debentures has become substituted with TFCs.
(v) Insurance agencies: Insurance agencies use a large pool of funds contributed by their policy holders. Insurance firms grant loans and earn investments out of this pool. Such loans are the supply of medium term financing for various businesses.
(3) Long Term Finance:
Long lasting finances are people who are required on permanent basis or for over five years tenure. They're basically wanted to meet structural adjustments to business and for heavy modernization expenses. Sorts required to initiate a whole new business strategy plan or for a longer term developmental projects. Following are its sources:
(i) Equity Shares: This technique is most widely used all over the world to boost long lasting finance. Equity shares are subscribed by public to build the funding base of a big scale business. The equity share holders shares the gain and lack of the organization. This technique remains safe and secure and secured, in this way that quantity once received is merely paid back before wounding of the organization.
(ii) Retained Earnings: Retained earnings are the reserves which are produced by the surplus profits. When your in trouble they are often utilized to finance the organization project. This is called ploughing back of profits.
(iii) Leasing: Leasing is another supply of lasting finance. By making use of leasing, new equipment can be acquired with no heavy outflow of money.
(iv) Loan companies: Different finance institutions such as former PICIC offer lasting loans to business houses.
(v) Debentures: Debentures and Participation Term Certificates may also be used as a resource of long term financing.
These are generally various causes of finance. In reality there is no strict rule to differentiate among short and medium term sources or medium and long term sources. An origin by way of example commercial bank offers both a brief term or a lasting loan based on the needs of client. However, every one of these sources are likely to be used in the modern business community for raising finances.