Causes of business finance can be used under the pursuing heads:
(1) Short Term Finance:
Short-term finance is needed to fulfill the current needs of business. The current needs may include payment of income taxes, salaries or wages, repair expenses, payment to lender etc. The need for short term finance develops because sales revenues and purchase payments are not properly same at all the time. Sometimes sales can be low as compared to purchases. Additional sales may be on credit while purchases are on cash. So brief term finance is needed to match these disequilibrium. Finance
Sources of short-run funding are as follows:
(i) Bank Overdraft: Bank overdraft is very widely used method to obtain business finance. Beneath this client can pull certain sum of money over and above his original account balance. As a result it is a lot easier for the businessman to meet brief term unexpected expenses.
(ii) Bill Discounting: Bills of exchange can be reduced at the banks. This kind of provides cash to the holder of the invoice which is often used to fund immediate needs.
(iii) Improvements from Customers: Advances are generally demanded and received for the confirmation of orders However, these are also used as source of financing the functions necessary to execute the position order.
(iv) Installment Acquisitions: Purchasing on installment offers more time to make payments. The deferred obligations are being used as a source of financing small expenditures which are to be paid immediately.
(v) Expenses of Lading: Bill of lading and other move and import documents are being used as a guarantee to adopt loan from banks which loan amount can be taken as finance for a while period.
(vi) Financial Corporations: Different financial institutions also help businessmen to get out of financial problems by providing short-term lending options. Certain co-operative societies can arrange short term financial assistance for businessmen.
(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Many of these transactions bring about increasing data files payable of the business that happen to be to be paid after having a certain time period. Goods are offered on cash and repayment is made after 31, 60, or 90 times. This allows some flexibility to businessmen in getting together with financial difficulties.
(2) Channel Term Finance:
This fund is required to meet the medium term (1-5 years) requirements of the business. Such finances are basically required for the balancing, modernization and changing machinery and plant. These are generally also needed for re-engineering of the organization. That they aid the management in completing medium term capital projects within planned time. Following would be the sources of medium term finance:
(i) Commercial Banks: Commercial banking institutions are the major method to obtain medium term finance. They supply loans for different time-period against appropriate securities. For the termination of conditions the loan can be re-negotiated, if required.
(ii) Hire Purchase: Hire purchase means buying on obligations. It allows the business enterprise house to have the required goods with payments to become in future in agreed installment. Needless to say that some interest is always charged on outstanding amount.
(iii) Economic Institutions: Several financial establishments such as SME Lender, Industrial Development Bank, and many others., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on different matters.
(iv) Debentures and TFCs: Debentures and TFCs (Terms Fund Certificates) are also used as a method to obtain medium term finances. Debentures is an acknowledgement of loan from the company. It is usually of any duration as decided among the parties. The debenture holder enjoys come back at a fixed rate of interest. Under Islamic mode of financing debentures has been replaced by TFCs.
(v) Insurance agencies: Insurance companies have a sizable pool of funds contributed by way of a coverage holders. Insurance companies give loans and make opportunities out on this pool. Many of these loans will be the source of medium term financing for various businesses.
(3) Lengthy Term Finance:
Long term finances are those that are required on long lasting basis or for over five years tenure. They can be basically desired to meet structural changes in business or for heavy modernization expenses. They are also needed to initiate a brand new business plan or for an everlasting developmental projects. Pursuing are its sources:
(i) Equity Shares: This method is most trusted around the globe to raise permanent funding. Equity shares are fell by public to create the main city base of a sizable scale business. The collateral share holders shares the profit and loss of the business. This method is secure and established, in a sense that quantity once received is merely repaid at the time of wounding up of the corporation.
(ii) Retained Income: Retained earnings are the reserves that are made from the excess profits. In times of need they can be used to finance the business job. This is also called ploughing back side of profits.