Causes of Business Finance


(1) Temporary Finance:

Short-term finance is necessary to match the current needs of commercial. The existing needs might include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The necessity for temporary finance arises because sales revenues and get payments usually are not perfectly same at the time. Sometimes sales might be little as in comparison with purchases. Further sales could be on credit while purchases are stored on cash. So temporary finance is required to match these disequilibrium.

Options for short-term finance are as follows:

(i) Bank Overdraft: Bank overdraft is quite popular supply of business finance. Under this client can draw certain amount of cash in addition to his original balance. Thus it is a lot easier for that businessman to meet short term unexpected expenses.

(ii) Bill Discounting: Bills of exchange may be discounted in the banks. This gives cash for the holder with the bill which can be used to fund immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, sorts utilized as supply of financing the operations important to execute the position order.

(iv) Installment Purchases: Purchasing on installment gives more hours to produce payments. The deferred payments are used as being a supply of financing small expenses which can be to be paid immediately.

(v) Bill of Lading: Bill of lading along with other export and import documents are used like a guarantee to look at loan from banks and that amount you borrow can be used as finance for a limited time period.

(vi) Banking institutions: Different finance institutions also help businessmen to emerge from poverty by giving short-term loans. Certain co-operative societies can arrange short term financial help for businessmen.

(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions lead to increasing accounts payable with the business which are to become paid after a certain time frame. Merchandise is deeply in love with cash and payment is done after 30, 60, or 3 months. This enables some freedom to businessmen in meeting financial difficulties.

(2) Medium Term Finance:

This finance must match the medium term (1-5 years) requirements with the business. Such money is basically required for the balancing, modernization and replacing machinery and plant. Forms of needed for re-engineering in the organization. They aid the management in completing medium term capital projects within planned time. Following will be the causes of medium term finance:

(i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for various time-period against appropriate securities. At the termination of terms the borrowed funds may be re-negotiated, if need be.

(ii) Hire Purchase: Hire purchase means buying on installments. It helps the company house to offer the required goods with payments to make from now on in agreed installment. Needless to say that some interest is always charged on outstanding amount.

(iii) Loan companies: Several finance institutions such as SME Bank, Industrial Development Bank, etc., offer medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on several matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) can also be utilized as a resource of medium term finances. Debentures is surely an acknowledgement of loan from the company. It is usually from a duration as agreed one of many parties. The debenture holder enjoys return with a fixed price of interest. Under Islamic mode of financing debentures has become replaced by TFCs.

(v) Insurance agencies: Insurance companies have a very large pool of funds contributed by their policy holders. Insurance providers grant loans making investments using this pool. Such loans will be the way to obtain medium term financing for several businesses.

(3) Long Term Finance:

Long term budget is the ones that are required on permanent basis and over five years tenure. They're basically planned to meet structural modifications in business or for heavy modernization expenses. Sorts necessary to initiate a fresh business strategy or a permanent developmental projects. Following are its sources:

(i) Equity Shares: Using this method is most widely used around the globe to boost lasting finance. Equity shares are subscribed by public to build the capital base of a giant scale business. The equity share holders shares the money and lack of the business enterprise. This method remains safe and secure and secured, in a sense that amount once received is simply repaid during the time of wounding up of the business.

(ii) Retained Earnings: Retained income is the reserves which are produced by the profits. When your in trouble they can be utilized to finance the organization project. This can be called ploughing back of profits.

(iii) Leasing: Leasing is also a way to obtain long-term finance. With the help of leasing, new equipment can be found without the heavy outflow of income.

(iv) Financial Institutions: Different loan companies for example former PICIC also provide long term loans to business houses.

(v) Debentures: Debentures and Participation Term Certificates will also be utilized as a resource of long-term financing.

They are various options for finance. In reality there is absolutely no cast in stone rule to distinguish among short and medium term sources or medium and long term sources. A resource as an example commercial bank offers both a quick term or a long lasting loan based on the needs of client. However, every one of these sources are frequently utilized in the modern world of business for raising finances.