As business starts considering to meet her financial in ways to its
needs in terms of the
payroll, expansion, purchasing, and other various needs. The sources
that finance these actives are either falling under long term or short term financing
categories. The terms are due to the varying in time between the extension and
demands for fee work as the principal difference sources of funding. The source
of ownership and are based on the time period and control of the finance.
According to the time period, sources of
funding a business are categorized based on the time period for which the money
is needed. Time period is normally classified into the following two
Long Term Financial Purpose
are be able to take gain from a wide range of short term funding sources. Banks
give short term loans as well as often arranging for overdraft protection (Dontigney,
2017). Overdraft protection entails the concern of time breaks among acquisitions
and sales. Sellers frequently offer dealings with a catalogue on trade credit, implying
that the business obtains goods and develops an opening of time in advance
prior to the bill comes due. In principle, the seller gives the business time
to sell the catalogue and cover the amount from the agreements they made. The
business may also use credit cards, whichever given out to the owner or to the
business, to cover short term costs. Factoring enables a business increase their
wealth by marketing its remaining charges for the ratio of their current value.
Short Term Financial Purpose
to Dontigney, (2017), long term funding sources are rarer than short term
sources, as the financier requires a considerable amount of cash backup to put
up with the loan. Banks arrange for long term loans, but the loan procedure
involves deep inspection of the debtor’s monetary state. On the other hand, Angel
investors and Venture financiers invest in promising businesses with the
expectation that it requires several years before a business turn out to be
profitable. Small Business Administration can assist a business loan, though it
does not loan directly. Local economic growth organizations at times offer extra
loans, if a business can access a customary loan from a bank (Dontigney, 2017).
Sources of Financing
2.1 Short Term Financing
2.1.1 Trade Credit
Trade credit refers to
credit settled to manufacturing and merchants by the providers of raw material,
finished goods, mechanisms, etc.
2.1.2 Cash Credit
This bound is known as cash
credit limit. In the beginning this limit is arranged for one year. . (Dutta,
2015) This limit can be prolonged after review for an additional year. Nevertheless,
if the debtor still wishes to continue the limit, it must be improved after 3
2.1.3 Over Draft
Before a bank permits its creditors
or account holders to take out money in excess of the balance in his account up
to a specified limit, it is known as overdraft facility
Banks also loan money by writing
off bills of exchange, promissory notes and hundies. When these documents are offered
before the bank for discounting, banks credit the sum to customer’s account
after removing discount.
2.2 Long Term
This is the handing
out of shares of the business to other stakeholders who need to buy into the business.
The main benefit of giving out shares is that
the stockholders have some degree of liability if the business be unsuccessful.
Personal belongings are not at risk and their liability is limited to the concrete
resources put in. Also the capital is raised by handing out shares (which are a
part of what the business is valued) to financiers, who are encouraged to purchase
by the possibilities of receiving dividends or profits on their shares. Also
shares can be sold as preference shares which offer a fixed return as profits
change from year to year, according to how well the company has done.
The drawbacks of selling shares are the executive
costs of issuing shares are high. Also it is difficult to estimate the market
price of shares, though this problem can be avoided if tender issues them,
where investors state how much they are willing to pay for them. Also the price
of the shares can go up or down and shareholders may have to sell at a lower
price than they bought it. Also the shares of an Ltd will have to be traded confidentially,
which costs money and financiers would might not want to invest due to the lack
of aggravation from buying into a company.
2.2.2 Bonds and
A debenture is
a long term loan, which does not have to be repaid until an agreed date.
Debenture holders are authorized to a fixed rate of the return year and have
priority over all the shareholders (Surbhi, 2015).
The advantage of this is that people can source
capital to a business in the form of a long-term loan called debentures, which
have to be payed off on a decided date. These payments take importance over
payments to all other stockholders. (Ogier, et al., 2012 )
The shortcoming is that the business has to
offer some security for the loan, which can be sold if the business cannot meet
the expenditures. In the case of a fixed debenture this is a particular asset
such as a construction or land (Rajasekaran, 2012)
This is the
money that the business makes being re-invested into the business to aid its
The advantage of this is capital can be
raised by the company reinvesting or ploughing back the profits made at the end
of the year, after expenses and dividends to shareholders have been paid.
The disadvantage of this is profits may be
scare or non-existent, especially in times of recession. (Schmidt, August, 2013)
2.2.3 Public Deposit
According to Brigham,
(1998) public deposit comprises cash received by a non-banking company by way
of securities or loan from the public as well as the employees, customers and stockholders
of the company other than in the form of shares and debentures. This kind of
financing is mostly used by companies for their medium and long-term needs.
These kinds of financing was very popular before initially in most places since
they offered more interest than what the banks offered to other people.
In India for instance, before independence people preferred saving deposits of
their money in well-known public companies.
Critical evaluation of these sources of finance
When it comes to making decisions and
discovering forms of financing the major difference can be observed from the
definitions and the duration of these funds to be observed and operate. Funding
that covers for a period further longer than 18 months period is usually called
Long-Term Financing, whereas financing that covers more than a period of 30
days to 18 months is usually called Short-Term Financing. As a result
businesses’ primary decisions when it comes to financing will be in between the
two choices that would vary from long term to short term ones (Westcourt,
Short term financing this also called working
capital financing which establishes finance needs that get up to become finance
current assets for a period not more than a year. Working capital is utilized
in the business’ daily transaction processes. Short term funding may be useful
in paying contractors, rise in inventory and insure expenditures in the absence
of cash availability on hand.
Based on the business’ requirements one might
consider using one of the following options. One of the options one can
consider is the use of overdraft. This covers the cash capitals at the same
time it supports in safeguarding your business’ credit assessment. Apart from
that one might consider line of credit funding when it is essential to be
compensated after you have additional money giving you flexibility, value.
On the other hand, Long-term financing
options that can support you apply in overall developments to the business, for
a period not less than 5 years. Capital expenses like improving equipment,
purchasing other automobiles and revamping are subsidized using long-term
sources of finance.
Businesses may opt to adopting the following
options like leasing. Structuring a lease to equate a worthwhile of the asset’s
a life. This might assist in preserving your money and rm loans (from financial
institutions, commercial banks and government) enables accurate prediction your
scheduled cash flow over steady monthly expenses.
Compare and contrast the two forms of finance
Upon reviewing the two forms of finance the
following are their comparisons and differences. Short term financing refers to
personal or business issues loans which have a shorter than average span for
paying back the loan, usually one year or less than that. Long term financing
on the other hand, refers to individual or commercial loans whose life span
have longer repaying that possesses extended time span for repaying the loan
which is usually more than year.
Fund raised up from short term financing is
normally has a smaller amount cost than those from long term financing due
to their Flotation cost are lower, It
does not take into account development risk premium. Those that rose from long
term financing is more costly compared to those from short term ones due to its
floatation costs being expensive and consist of maturity risk premium.
Short term funding is more flexible compared
to long term financing due to the sum of the fund raised by means of short term
financing can be changed according to the requirements. Long term financing is
less flexible than short term financing as the amount of funds raised using
sources of long term financing cannot be changed as per requirement. Even
though with a repayment establishment, long term debt can be repaid earlier,
installment fines may be charged.
Short term loan arrangements are less
limiting than those under the long term loan agreement. Long term loan
agreements comprise of limiting provisions or covenants which restrain the
business’s future arrangements and undertakings.
Short term loans might not demand deposit or
security. Long term loans require specific assets or deposit or security.
Short term financing is more riskier compared
to long term financing because interest rate on short term loan is relatively
not constant and temporary recession may render to no payments of debt and may
lead to liquidation. Long term financing is less riskier than short term funding
since interest rate on long term loan is reasonably stable and temporary
recession do not affect it much.
Fund raised from short term financing should
not be castoff to purchase fixed assets such as land and construction, plant,
machinery, furniture and vehicles rather it should be used to rise the level of
current assets and working capital. Fund raised from long term sources can be
used to in funding any type of assets such as current assets or fixed assets.
Fundamental issues of business finance
owners and company financial overseers out to know the following issues in
financial management in their businesses undertakings.
Barter Exchanges are a earnings for businesses with less cash
to interchange services or goods or occasionally this may be also include them
giving an important amount of discounts compared to their normal charges as
result attaining support and their ongoing operations and when facing hard
the development of discovering important points of assessment for monetary and
other quantifiable analyses.
Budget Exercises in certain organizations me companies having regular
economical exercises as a matter of course, accumulating to the continuing
level of pressure practiced by individuals handling finances.
Capital Budgets these are sets of expenditure stages for long-term
assets that are expected to create revenues within a prolonged amount of years.
Data security is one of the foremost issue that concern in
the monetary services industry, with a good prospective liabilities. It comprises
not only information technology work but also risk controlling and compliance workers.
Invoice Discounting inspires quicker sum of bills settled by clients,
decreasing accounts receivable. Mostly applied in tandem through punishments, for
instance the arraigning of interest, for delayed payments. Rich businesses are utilizing
this concept in the opposite, as a means to spread required funding to
suppliers that cannot get bank credit at rational rates, or at all.
Internal Rate of Return (IRR) this is a normal metric used in project
analysis, to evaluate promising corporate investments. More
Junk Bond Finance this was well known well known in 1980s as
one of the method which financed companies that were still fresh in the market
or were making insufficient funds to beat equity markets.
The Lehman Wave refer to how minor
rise and fall in production, manufacturing or demand at one end of a long
supply chain, can come to be significantly magnified by the time they spread
back to the contrasting end of the chain. This set of awareness has enormous consequences
for business managers in a variety of productions (Kolakowski, 2017).
Net Present Value (NPV) this is a fundamental tool used as an essential
tool of business finance analysis. Also referred to Discounted Cash Flow
Analysis, it is applied in many different scenarios, from savings analysis to
corporate budgeting to project investigation (Kolakowski, 2017).
Linkage of these sources of finance with the shareholders wealth
Ideal proportions of Short-Term and Long-Term
financing are important when it comes to the shareholders. When it comes to working
capital investment strategy, no one combination of short term and long-term
debt is essentially ideal for businesses. In the selection of a financing plan
that capitalize on shareholder wealth, a business’s financial owner need to take
into account numerous other factors, such as the variability of sales and cash
flows, that move the assessment of the business.
For instance, as soon as the revenue is more
than that of the business spend on its good money upon charging the customer at
higher rates, the worth of the cash of share is goes up and if the stock market
rises in relation to its earnings. Then the shares are easily sold effortlessly
traded in the marketplace.
Shareholder might skip great worth risk and when
it comes to losses, they are not able to get the payment. However the company
need to find ways be it to recover the shareholder’s money from the business.
The upside of external financing from
shareholders is that, its cost more as the overdrafts comprises charges as well
as they are additional exclusive than the long term source of finance and sometime
customer have to remuneration the extra over charge if they passed the duration.
Therefore, after the use of unlike tools of
financial management it can be indicated that finance is a key prerequisite for
any business and include some cost. In order to remain strong in market place
it is must for firm to take best possible use of its financial resources.
The financial statements can assessed by
using ratio analysis and investment decisions should be made after analyzing
the projects using capital administration techniques.