A look at the sources of business finance
Essentially, when we talk about sources of business finance, we are basically looking at ways in which a business can get additional money for expansionary purposes, open a new business branch or simply to add stock. Sources of business finance can be categorized into 3:
• Short term finance
• Medium term finance
• Long term finance
Short term finance
As the name implies, this is the kind of finance that a business sources for the purposes of meeting current short term business needs. Such needs may include any of the following: payments to creditors, salaries, payment of taxes and so on and so forth. In most cases, the need for short term finance is informed by the difference in sales as compared to purchases. For instance, purchases can be made on cash while sales are made on credit thereby making a business to seek for short term finance to meet their current needs. Sources of short term finance include:
This is where a business is allowed to withdraw over and above the money they hold in their bank accounts. It is commonly used by many businessmen and therefore makes it possible for the meeting of current business needs. For instance, a business can overdraw their bank account for the purposes of purchasing a top rated electric shaver and add on their stocks.
This is where a business requires a customer to send payment in advance for the confirmation of orders made. Customer advances are therefore a great source of finance especially when a business is running low on cash.
Other sources of short term finance include bill of lading, bill discounting, installment purchases, trade credit, financial institutions just to mention but a few.
Medium term finance
Medium term finance is the kind that a business sources for the purposes of meeting business medium term needs (1-5 years). Medium term finances are essentially needed for the purposes of replacing machinery, furniture, modernization, balancing, business re-engineering and so on and so forth. Medium term sources of finance include commercial banks, insurance companies, debentures, hire purchase as well as financial institutions.
Long term finance
When we talk about long term finance, we are basically looking at finance sources required on permanent basis or for periods exceeding a period of 5 years. A business desires long term finance for the purposes of meeting heavy modernization processes or business structural changes. They are also instrumental when a business wants to initiate a long term development project or simply set up a sister company. Long term sources of finance include retained earnings, debentures, financial institutions, leasing, equity shares just to mention but a few.
To sum it up, the aforementioned sources of finance are not exhaustive. In fact, we can’t say in totality that a given source of finance is medium term or long term. What we can all agree is that businesses cannot do without sources of finance. At some point, they will require cash injection either to meet current needs or simply to set in motion a long term project.