Money is the cause of all evil.
I would disagree with the above statement, as Money is still the most important means of everyone life. But the thing is everyone wants to live a stable income and comfort life which is enough to state that everyone wants money to sustain.
Source of Finance
Short Term Finance
This finance is required to fulfill the daily needs of the business - this may include:
- - Payment of taxes
- - Salaries or wages
- - Repair Expenses
- - Payment to creditors
Why do we need short term finance:
Cause sales revenues and purchase payments never remain balance at every calender month. The fluctuation of sales and payment keep happening, as comparison, sales may be on credit terms and purchases are on cash terms. So short term finance are always required for equalization for the both terms.
Sources of short-term finance can be categorised below as:
- a) Bank Overdraft - customer draws a certain amount of money over and above his current balance. This always help the businessman to keep fulfilling their requirement of daily unexpected expenses.
- b) Bill Discounts - bills of exchange can be discounted which helps the bill holder to enhance cash which is required for immediate needs.
- c) Advance again the job order - this is always demanded confirmation of the job which helps as a source of financing for executing the operational necessities.
- d) Make a purchase in instalment - which gives more time in making the payments, this source of finance often useful for a businessman to pay without stress.
- e) Lading Bill - this source of finance is used along with the importer and exporter documents to take a loan from the bank as a guarantee.
- f) Financial Institutions - this private or public institute also help a businessman in financial assistance by providing short-term loans. Also, some co-operative societies also play a major role in this.
- g) Trade Credit - as a normal practice major businessmen buy raw materials, store and spares on credit terms. These businessmen payback by selling goods on cash and pay to the supplier after the certain period of time like 30, 60 or 90 days.
2) Medium Term Finance - finance which is required for business for 1 - 5 years falls under this category. Such finance is usually needed for:
- - Balancing their business
- - Modernization
- - Replacement of machinery and plant
- - Re-engineering of the management
Sources of medium-term finance
- a) Commercial Banks - provide loans to a businessman for different time-period against their securities. Also helps them at the time of termination of loan process by re-negotiating it.
- b) Buying in instalments - this helps certain businessman to buy goods on instalment with agreed interest rates.
- c) Financial Institutions - like SME banks, industrial development banks, etc., always there to help businessman with medium and long-term finances. These banks also help with technical and managerial matter wherever required.
- d) Debentures and Terms Finance Certificates - Debentures being an acknowledgment of loan from the company. And as per Islamic mode of financing debentures has been replaced by TFCs.
- e) Insurance company - with the source of their policyholder these insurance companies are major helpful for businessmen as the source of finance.
3) Long Term Finance
Big scale companies always opt for this source of finance as they get on permanent basis or for more then 5 years tenure.
- - structural change of the business unit
- - heavy modernization expenses
- - new business plan
- - long-term development projects
Sources for long-term finance are:
- a) Equity Shares - Most of the individuals and businessman from all over the world are involved in equity share to raise long-term finance.
- b) Retained Earnings - reserve amount which is generated from the excess profits - also termed as plowing back of profits.
- c) Leasing - helps businessman to invest in new equipment without much hassle.
- d) Financial Institutions - Former PICIC are helpful for this long-term finance.
- e) Debentures and Terms Finance Certificates are main source for businessman.
It essential you are thinking about your small business financial needs, does that really require a finance department? Not really, but for solving your financial needs your own presence will be much useful which will help you know yourself about the problem you are facing at the present situation. Slowly, this will open your mind and help you in taking right decisions.