Financing is one of the crucial elements required for the survival of a business. Proper financial planning is necessary for securing the future of any organization. There are various sources of financing that businesses can avail, depending on the needs of the business. These sources are broadly classified into short-term, long-term and medium-term finance.
This type of financing is usually required for fulfilling the present requirements of a business. These may be paying wages, salaries, taxes, creditor payment, repair expenses, etc. When the purchase payments and sales revenues aren’t the same, short-term financing might be needed. Sales might be low or on credit, while the purchase is made in cash. To deal with this disbalance, businesses use short-term finance.
Some major sources of such financing include:
- Bank Overdraft:
This allows people in business to draw a sum of money more than the original balance. It makes it easier for them to meet the unexpected expenses on a short-term basis.
- Purchase instalments:
When purchases are made on instalments, there is more time for making payments. Small expenses can be financed through these deferred payments.
- Bill Discount:
Banks can discount bills of exchange. The bill holder can use the cash obtained for financing current needs.
- Financial Institutions:
Short term loans can be availed from different financial institutions.
This type of financing helps in meeting business requirements over a medium term. Funding over 1 to 5 years is considered a medium term. Such financing is needed for modernisation, balancing, replacement of plant and machinery, re-engineering the organisation, etc. Following are sources of such financing:
- Commercial Bank:
Being one of the primary sources of such financing, commercial banks provide loans against securities for the required time period. If necessary, renegotiation of loan is also possible if terms are terminated.
- Insurance companies:
Policyholders of insurance companies contribute to a huge pool of funds. The companies use this pool for making investments and granting loans.
Long Term Financing
These are the finances required for over 5 years or even permanently. Long term financing is usually needed for implementing structural changes in the business. Huge expense for modernisation might also require such financing. Major sources include:
This is one of the most widely used sources for long term financing. Equity shares help in generating capital for a business.
It allows the acquisition of new equipment without a massive cash outflow.