Wednesday, 17 October 2012

Define business finance or describe the sources of short term and long term finance or various types of business finance

According to George Terry "Finance consists of providing and utilizing the money, capital rights, credit and funds of any kind which are employed in the operation of an enterprise."

So business finance means investing borrowing and spending of money with proper manner so for the operation of a business.

Importance Of Business Finance :-
For any successful business finance has a primary importance. Finance is life blood for business. No business can run smoothly with out finance. There is a need of sufficient to achieve the desired results from the business activities.

Sources Of Business Finance :-
There are two sources of business funds :

1. Creditors.    2. Owners.

Creditors provide the funds temporarily while owner provide the funds permanently.
Following are the important sources of business finance :

1. Owners Financing or Equity Finance in Financing :-
If a firm needs the financial needs of a business from the funds supplied by the owners, it is called equity financing. When owner uses his own capital for current and fixed assets then he saves himself from the following problem.

a. He will not pay interest to any body because he has used his own capital.

b. He will not give the profit to any lender.

c. He will improve the quality of facing slumps.

d. For getting the loan he will not face any problem.

e. He will be able to control the business with full concentration.

2. Non Company Equity Financing :-
If sometime a proprietor is not able to meet his financial needs from his personal capital and he is also not ready to borrow then he can increase the equity capital by admitting any trust worthy sound party in his business.

3. Company Equity Financing :-
By selling the ordinary shares, a company may obtain the equity capital. Common stocks represent the ownership. The common stock holders have a right to receive profit declared by the company. They can also give vote and sell the shares in the market.

4. Financing Through Reserve Profit Ploughing Back Profit :-
To increase the owned capital of the firm a part of the profit is retained in the business. From this capital it can meet the financial needs easily. A firm can also use this part of profit for the extension of business or to face the depression.

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

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

The duration range of the intermediate term finance is from one year to ten years. Short term and medium term loan is provided by the following agencies.

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

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

4.    Foreign Exchange :-
These banks advance loans to 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 limited.

6.    Private Money Lender :-
Private money landers like landlords and Sahukar also lends the money both 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 Agency :-
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 agent also provide short term finance to the concerned business.

11.    Commercial Paper House :-
These financial agencies are from 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.

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

1.    Financial Institutions :-
There are various financial institutions which provide long term finance to the industry and business.

2.    Saving 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 share holders. They transfer some portion of the profit to reserve funds every year. So a company uses this saving for investment.

3.    Proprietors Own Resources :-

The proprietors may meet the long term financial requirement by the following sources :

i.    Joint stock company can issue the shares or debentures.

ii.    Sale traders and partner can dispose of 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 affairs of a business.

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

6.    Bonds :-
This is an important source of long term finance under this system large size business issue secured and unsecured bonds. These bonds may be disposed of directly or through agent.


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