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Thursday, 23 June 2011

What is Debt finance and discuss the types or kinds of business finance

DEBT FINANCING :-
When we meet the financing needs by borrowing it is called debt financing. It is obtained if we owned capital of a firm is not sufficient to meet the business needs. Sometimes loan is obtained to save the business from dissolution and sometimes to meet the urgent expenses. Loan is obtained from creditors for short term for long term and for medium term.

Types of Business Finance :-
Following are the important types of business finance :
1. Short Term Finance.
2. Medium Term Finance.
3. Long Term Finance.

SHORT TERM FINANCE :-
This type of source is obtained for a period of one year or less than one year. It is required for the temporary needs of the business.

MEDIUM TERM FINANCE :-
The duration range of the intermediate term Finance is from one year to ten years. Short term and medium term loans is provided by the following agencies :

SOURCES OF SHORT TERM AND MEDIUM TERM FINANCE

1. Commercial Banks :-
The commercial banks receive the savings of the people and lend it for short term businessman. The bank advances the loan in the shape of cash or over draft.

2. Federal Government Agencies :-
Many agencies of the central bank provide loans to private business. Generally central bank authorizes them to advance loan in the emergency period.

3. Re-discounting Facilities :-
Central bank provides re-discounting facilities on 1st Class bills. The cash can be raised when bank loans are not available on simple terms.

4. Foreign Exchange Banks :-
These banks advance loans the large scale foreign business according to nationality.

5. Friends and Relatives :-
A number of persons borrowing from friends and relatives, for a short period. But this source is very limit.

6. Private Money Lender :-
Private money lenders like landlord and Sahukar also lends the money but their rate of interest is very high.

7. Finance Companies :-
These are specialized finance companies and they also lend the money for short and medium terms.

8. Cooperative Societies :-
These provide loans to rural areas for business on the security of land. These provide short term and medium term loans.

9. Consumption Credit Agencies :-
These companies provide the loans for consumption goods. Small businessman borrows the money for short and medium term from these agencies.

10. Finance Facility by Agent :-
Sometimes managing agents also provide short term finance to the concerned businessman.

11. Commercial Paper House :-
These financial agencies are formed to buy the promissory note of the small business and then resale them to the investors in the open market.

12. Partial Payment Method :-
Some producers sell their product on cash basis and others on installment basis. Some portion of the price is paid at the time of purchase and the balance is paid on installment basis. This method is also useful in providing short term finance.


LONG TERM FINANCE :-

This type of finance is required for a period more than ten years. The long term finance is used for the construction of building and machinery. Long term loan is provided by the following sources :


SOURCES OF LONG TERM FINANCE

1. Financial Institutions :-
There are various financial institutions which provide long term finance to the industry and business. For example in India, ICICI, IFCI and IRBI and in Pakistan, PICIC, IDBP,NIT and Insurance Companies are those institutions which provide long term loan.

2. Savings of the Company :-
A long term finance is also act by the savings of the company. A company does not distribute its all profit among the shareholders. They transfer some portion of the profit the reserve funds every year. So a company uses this saving for investment.

3. Proprietors Own Resources :-
The proprietor may meet the long term financial requirement by the following sources :
i. Joint stock company can issue the shares or debentures.
ii. Sole traders and partner can dispose off their private assets.
They can also use their profit.

4. New Partners :-
By inviting new partners in a firm the volume of capital can be increased. The new comers will contribute their share of capital in business but they will not participate the affairs of a business.

5. Underwriters :-
In obtaining the long term finance for a public limited company underwriters services can not be ignored. They undertake to dispose off the securities of the companies and receive commission for their services.

3 comments:

We buy houses cash 21 July 2011 at 13:19  

hi,
here i want to know who much due pay after the debt of finance not in time?

Storage Business Financing 28 July 2011 at 05:25  

Thanks For Sharing.....
Nice Small Business Trends and Tips Shared by you...............
Storage Business Financing

Shiva Prasad 29 April 2014 at 00:15  

change font color. make it black font.request to admin

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