Short term loans can be availed from banks and other financial institutions. Banks extend these loans after careful study of the business, its working capital cycle, past track record etc. Once availed, these loans are repaid either in small installments or may be paid in full at the end of the period. This depends on the terms of the loan. It is advisable to use these loans for financing permanent working capital needs.
There are other alternatives to fund the temporary working capital needs. For more refer Working Capital Loans. Business line of credit, a type of short term financing, is most appropriate for termporary working capital needs.
In this type of financing, an amount is approved by the issuing bank or financial institution. Within the limit of this amount, the business can make payment and keep depositing once payment from customers is received. It works like a revolving credit and best part of this is the interest is charged on the utilized amount only and not on the approved amount. The business has the flexibility to deposit unused amount to save on interest cost. This way it becomes a very cost-effective financing option.
Invoice discounting is another source of short-term finance where the receivable invoices can be discounted with the financial institutes or banks or any third party. Discounting invoices means the bank will pay you the money at the time of discounting and collects the money from your customer when the bill becomes due.
Factoring is also a similar arrangement like invoice discounting where the accounts receivables of a business are sold to a third party at a price which is lower to the realizable value of the accounts receivable. Sources of finance for business are equity, debt, debentures, retained earnings, term loans, working capital loans, letter of credit, euro issue, venture funding etc. These sources of funds are used in different situations. They are classified based on time period, ownership and control, and their source of generation.
It is ideal to evaluate each source of capital before opting for it. Sources of capital are the most explorable area especially for the entrepreneurs who are about to start a new business. It is perhaps the toughest part of all the efforts. There are various capital sources, we can classify on the basis of different parameters.
Having known that there are many alternatives to finance or capital, a company can choose from. Choosing the right source and the right mix of finance is a key challenge for every finance manager. The process of selecting the right source of finance involves in-depth analysis of each and every source of fund. For analyzing and comparing the sources, it needs the understanding of all the characteristics of the financing sources. There are many characteristics on the basis of which sources of finance are classified.
On the basis of a time period, sources are classified as long-term, medium term, and short term. Ownership and control classify sources of finance into owned capital and borrowed capital. Internal sources and external sources are the two sources of generation of capital. All the sources of capital have different characteristics to suit different types of requirements. Sources of financing a business are classified based on the time period for which the money is required.
The time period is commonly classified into following three:. Long-term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or maybe more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc of a business are funded using long-term sources of finance. Part of working capital which permanently stays with the business is also financed with long-term sources of funds.
Long-term financing sources can be in form of any of them:. Medium term financing means financing for a period of 3 to 5 years and is used generally for two reasons. One, when long-term capital is not available for the time being and second when deferred revenue expenditures like advertisements are made which are to be written off over a period of 3 to 5 years.
However, equity financing often results in dissolution of share ownership and it also decreases earnings. The cost associated with equity is generally higher than the cost associated with debt, which is again a deductible expense. Therefore, equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk.
A corporate bond is a special kind of bond issued by any corporation to collect money effectively in an aim to expand its business. This tern is usually used for long-term debt instruments that generally have a maturity date after one year after their issue date at the minimum. Some corporate bonds may have an associated call option that permits the issuer to redeem it before it reaches the maturity.
All other types of bonds that are known as convertible bonds that offer investors the option to convert the bond to equity.
Capital notes are a type of convertible security that are exercisable into shares. They are one type of equity vehicle. That is why the entire consideration the company aims to receive, for the future issuance of the shares, is generally paid at the time of issuance of capital notes. Many times, capital notes are issued with a debt-for-equity swap restructuring. Instead of offering the shares that replace debt in the present, the company provides its creditors with convertible securities — the capital notes — and hence the dilution occurs later.
Short-term financing with a time duration of up to one year is used to help corporations increase inventory orders, payrolls, and daily supplies.
Short term finance in business usually refers to the additional money a business requires for doing its business for short terms, which is usually a maximum period of one year. Some main sources of short term finance are bank overdrafts,trade credit, factoring, credit card, lease and bank loans.
Sources of Short-Term and Long-Term Financing for Working Capital. A constant flow of working capital is an intrinsic component of a successful business.
This is a source of short term business finance lent for a specific period of time to a business to pay for goods that they have received. Trade Credit cycle usually runs for a period of 28 days. But sometimes businesses may not pay back the loan for much longer durations. Short term finance refers to financing needs for a small period normally less than a year. This type of financing is normally needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory, accounts receivables etc.
Short Term Sources of Finance. Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. 3 The Advantages of Short-Term Debt; 4 The Sources of Finance Available to a Business; "List of Different Sources for Short-Term Business Financing." Small Business.