Various sources of business finances are available today for business owners. IT is of immense importance that you should know what types of financing you want so that you can focus on the type of business loan you would prefer. In this article, you will learn about the different types of business financing that are available to you.
The sources of the business financing options can get classified under these basic categories;
(1) Short Term Finances
Short-term finances are required for fulfilling the present requirements of all business ventures. The present requirements will include such things as paying taxes, salaries, wages, various expenses, paying creditors, and so on. The requirements for short financing will arise as the sales and revenues, and the purchase of payments will not be the exact same at every single time. There will be times when the sales will become very low when compared with the purchases. The sales may again go on credit when the purchases are based on cash.
What are the sources of short-term finances?
(i) Bank Overdraft: It is known for being a widely used business finance source. In this, a client will be able to draw money more than the original balance that he has in his account. Hence, it will be better for the businessmen to meet short-term and unexpected expenses.
(ii) Bill Discount: It can be easily discounted and the banks will provide immediate cash to the bill holder. This can be used for financing instant requirements.
(iii) Advances from Customers: This is primarily demanded confirmation of specific orders. But it is also preferred as a financing source for certain operations that are essential for executing job orders.
(iv) Purchase of Instalments: Purchasing on instalments will give more time for making payments. And, the deferred payments can be used for immediate payments.
(v) Bills for Lading: The Bill of lading accompanied by import and export documents can be used as a guarantee for loans. The loan amount can be used for the needs on a short-term basis.
(vi) Financial Institution: There are several financial institutions that help businessmen get out of difficult situations by giving them small-term loans. There are many cooperative societies that render short-term financial assistance to businessmen.
(vii) Trade Credits: It will be the general practice of most business owners to get raw materials, spares, and even stores on credits. These transactions will result in an increase in accounts payable for the business that needs to be paid after a definite time period.
(2) Medium Term Finances
This will need medium-term financing say 1-5 years. This kind of loan is taken by business ventures for replacing and modernizing plants and machinery, balancing, etc. It is also required for engineering organizations as well. In fact, this will aid the management to complete the projects within the deadline. The sources of medium-term financing are given as follows:
(i) Commercial bank: This is indeed one of the major sources of medium-term financing and they provide loans for varying time periods against appropriate securities. They also offer the facility of re-negotiation if required.
(ii) Hire Purchasing: Hire purchase will mean buying in installments. It enables businessmen to get the goods they require with installment payments. There will of course be some interests that would get charged on the pending amount.
(iii) Financial Institution: There are a lot of financial institutions like SME Banks, Industrial Development Banks, and so on that will also provide you with long and medium-term financial services. Besides providing finances they will also provide you with managerial and technical assistance on several matters.
(iv) Insurance Companies and agencies: There are insurance companies that have large pools of funds that are contributed by the policyholders. They will grant loans as well as make some kind of investments from that pool. This kind of loan will be the source of medium-term financing for a lot of different business ventures.
(3) Long-Term Finances
Long-term finances are given for a minimum of five years term period. They are primarily desired for meeting certain structural changes in the businesses or for a lot of heavy modernization expenses. These will also be needed for initiating new business plans and for long-term developmental projects. Following are the sources:
(i) Equity Share: This is a method that is preferred widely throughout the world for raising long-term finances. Equity shares are going to be subscribed by the public for generating the capital bases of large-scale businesses. The holders of equity shares will share the profits and losses of their business. The best part is, this method is quite secure and safe, and the received amount will be paid back when the company is being wounded up.
(ii) Financial Institutions: There are a number of financial institutions that can render business houses with long-term loans.
(iii) Debentures: Debentures and Participation Term Certificates is treated as the long-term financing source.
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There are several different sources of financing. It is a fact that you must not differentiate between the short and medium term financial sources and mid and long-term sources. Personal and business financing is a tricky thing, and one must be aware of the different facets that are involved here. Business financing should be kept separate from personal financing ways. In this post, you have read some of the available options for financing. But there are more options available for people in business as well.
Hopefully, the information mentioned in this article will have helped you. To get more updates about business debts and funding, you can check our other blogs which are written by experts. You can subscribe to our channel to get the latest blog updates time and again.