Mainly Three types of Business finance are; long-term finances , short-term finances and medium-term finances.
Short Term Finances
To meet the current needs businesses used short-term finances. The expenses includes of tax liabilities, a loan from creditors (banks) and some other expenses. If the company has more expenses in contrast to sales revenues then the company needs finance for a small duration to meet its current requirements. If the company is selling products on credit and purchase in cash, in this situation a company needs money to pay its current obligation.
Following are the sources of short-term finances:
It is a widely used source by most of the businesses in the difficult situation. Yes, any business can withdraw excess amount over his bank account balance. This is the fast and easy way to meet short-term needs.
Discounting Of Bill Of Exchange
The bill of exchange is presented to the third party or bank for immediate cash needs. For example, A sold goods to B on credit and withdraws a bill of exchange on B. But A Needs money before the due date, he will go to the bank and ask for the discounting of the bill. Bank will check the bill and credibility of the person on which the bill has withdrawn and paid cash to A. On due date the bank will present the bill to the Band will receive money on behalf of A.
Advance Payments From Customer
A business has a mix of cash sales and credit sales. When a company needs cash urgently, it can ask their customers to pay in advance. The customers who are doing business for a long time with the specific businessman have trust in them.
Purchases on Installments
Purchases on installments have some benefits like you need to pay a small amount in the start every month. You can use the amount o f money in the emergency or more urgent expenses. But one disadvantage you need to bear while paying in installments is that you need to pay an extra amount more than the invoice price of a product.
Bill Of Lading
For short-term loans bill of lading can also be used by a business to take loans from the banks. Bill of lading works as guarantee and business can withdraw a small amount of loan to pay its day to day expenses.
Some cooperative societies and financial institutions are offering short-term loans on interest bases to the small businesses. These institutions first check the credit worthiness and issue debts after attaining suitable security. Many small and big banks are offering loans to the small businesses.
Most of the businesses are doing purchases on credit. So mostly, 15days, 30days, 45days, 60days and 90 days credit terms used by the businesses. So, if you are running a business then try to purchase goods on lengthy credit terms and sell on a cash basis or short-term credit terms. In this way, it will easy for you to bear the burden of day to day or current expenses.
Medium Term Finances
The finances for medium-term need according to the company expenses requirements between 1 to 5 years. Businesses need to use such kind of finances for the maintenance and replacement of the plant and machinery. Mostly the companies use finances for medium term for use in the new projects between 1 to 5 years. Below are some sources of medium-term finances:
Banks are best options for small and medium companies for their medium requirements. The bank’s issue loans against securities and charge interest, the interest is an expense for the business and revenue for the bank. The loan is issued for 1 to 5 year period during which a payment made in installments every month.
On installments buying of goods and services is known as hire purchase. The goods or services purchased by business with the commitment to pay money in a specified future on installments. Some amount of interest is also charged on the outstanding amount of money.
When you talk about commercial banking then debentures are used as medium-term finance. Debenture holder earned interest income for the specific period. In Islamic banking and finance debentures are named as Term Finance Certificate. No interest is charged on the Terms Finance Certificates.
Every country insurance companies are offering different policy plans to its general public. These companies gathered a high amount of money from the insurance policyholders. Insurance companies utilize this money to pay loans to businesses on specific interest rate bases.
Mostly big companies need finances to meet their long-term requirements. The long-term finances issued for more than 5 years. If a company wants to acquire another company or want to expand its operation then he needs a high amount of money.
Below are some sources of long-term financing:
Issuance of Shares
Companies issue share to the general public to raise capital for the company expansion needs. Each share is issued on a specified price and dividend is offered to the holder of the share. The person who purchases the share of the company is known as the shareholder of the company.
Once the amount is received against shares purchased by shareholders, the company kept this amount till the end of the business. In the bankruptcy, if the company decided to close its business then owners will receive money when payments have been made to other parties. The stock market is the place where the company shares listed and you can fluctuation in the prices of stocks. Many companies acquire expensive equipment on leasing; It saves them from the high investment.
Many banks provide long-term finances to the big business against securities and creditworthiness. First banks check credit worth of the company then ask him for security. A fixed rate of interest is charged on loans issued to any company.
It all depends on the businesses requirements it will specify which kind of finances they needed. If they want to extend its operations then they can go for long-term financings like the issue of a share or bank loans. The small businesses mostly need money at the start of the business when they need to spend heavily on the advertisement and product development. Whether you are looking for short-term finances or long-term finance you should need to check what is the cost of finance? Can you bear it or not? What is the benefit or disadvantage of a loan?