Short Medium And Long Term Sources Of Finance

Short Medium And long Term Sources Of FinanceThere be many sources of pay, which would all bring home the bacon the calling with a quick source of money, which will demand a bun in the oven to be paid venture. But the tot the social club needs pile spring them to a range of sources of pay and methods of repayment e.g. amuse. The sources of finance stool be split up into three types long term, medium term and swindle term. Long term finance is mainly for companies who need a bombastic sum of money, which would be uncorrectable to be paid back, this would be utilise to pr tolerate start-up great(p) to finance the backing for its whole lifespan, finance the get of assets with a longer life, much(prenominal) as buildings and provide expansion dandy for large projects, much(prenominal) as building a new pulverization or taking over an separate pedigree. The repayment as it is so much would be paid over a number of years rather than straight away. Medium term finance is again for higher(prenominal) sums of money needed but not as high as long term, these usually would be used to finance the purchase of assets with a two to five year life, such as vehicles and computers, to replace an overdraft which is difficult to clear and is proving expensive and to finance a diverseness in strategy, such as to switch food marketing focus from Britain to the whole of Europe and so forth But the repayment would be faster than long term, such as in a couple of years and so forth short-run finance is when a company needs money quickly for immediate things, which argon temporary the repayments are much quicker than the otherwises. They would be used to bridgework temporary finance gaps, to get through periods when cash flow is forgetful and to cover temporary needs for extra funds due to unforeseen problems or opportunities.There are possible sources of finance, which available to a throttle company.Sources of Short-term FinanceThere are a numbe r of sources of short finance which are listed below1. trade in source2. Bank credence Loans and come abouts Cash conviction Overdraft Discounting of bills3. Customers advances4. Instalment credit5. Loans from co-operatives1. Trade CreditTrade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc.2. Bank CreditCommercial banking companys grant short-term finance to channel firms which is known as bank credit.(i) LoansWhen a certain pith is advanced(a) by a bank repayable after a specify period, it is known as bank loan..(ii) Cash CreditIt is an arrangement whereby banks drop out the borrower to withdraw money upto a specified find out. This terminal point is known as cash credit limit. Initially this limit is granted for one year. This limit coffin nail be extended after review for another year. However, if the borrower belt up desires to continue the limit, it must be enewed after three years. (iii) OverdraftWhen a bank allows its depositors or account holders to withdraw money in excess of the balance in his account upto a specified limit, it is known as overdraft facility. This limit is granted purely on the basis of credit-worthiness of the borrower .(iv) Discounting of BillBanks also advance money by discounting bills of exchange, promissory notes and hundies. When these documents are presented before the bank for discounting, banks credit the amount to cutomers account after deducting discount.3. Customers AdvancesSometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is instead large or things ordered are very costly. Customers advance represents a part of the payment towards price on the product (s) which will be delivered at a later date.4. Instalment creditInstalment credit is now-a-days a popular source of finance for consumer goods like television, refrigerators as easily as for industrial goods.5. Loans from Co-operative BanksCo-operative banks are a good source to compass short-term finance. Such banks afford been established at local, district and responsibility levels. District Cooperative Banks are the federation of primary credit societies.18.5 Merits and Demerits of Short-term FinanceShort-term loans help business concerns to make for their temporary requirements of money. They do not create a heavy burden of interest on the organisation. But sometimes organisations keep away from such loans because of perplexity and other reasons. Let us examine the merits and demerits of short-term finance.Merits of short-term financea) sparing Finance for short-term purposes can be arranged at a short notice and does not involve any cost of pinnacle. The amount of interest payable is also affordable. It is, thus, relatively more than economical to give notice short-term finance.b) Flexibility Loans to meet short-term financial need can be raised as and when requi red. These can be paid back if not required. This provides flexibility.c) No interference in management The lenders of short-term finance cannot interfere with the management of the borrowing concern. The management retain their freedom in decision making.d) May also serve long-run purposes Generally business firms keep on renewing short-term credit, e.g., cash credit is granted for one year but it can be extended upto 3 years with annual review.After three years it can be renewed. Thus, sources of short-term finance may sometimes provide funds for long-term purposes.Demerits of short-term financeShort-term finance suffers from a few demerits which are listed belowa) Fixed Burden Like all borrowings interest has to be paid on short-term loans irrespective of profit or pass earned by the organisation. That is why business firms use short-term finance only for temporary purposes.b) Charge on assets Generally short-term finance is raised on the basis of protective cover of movea ble assets. In such a case the borrowing concern cannot raise further loans against the security of these assets nor can these be sold until the loan is cleared (repaid).c) Difficulty of raising finance When business firms suffer intermittent losses of huge amount or market bespeak is declining or industry is in recession, it loses its creditworthiness. In such circumstances they find it difficult to borrow from banks or other sources of short-term finance.d) Uncertainty In cases of crisis business firms always face the uncertainty of securing funds from sources of short-term finance. If the amount of finance required is large, it is also more uncertainto get the finance.e) Legal formalities Sometimes certain levelheaded formalities are to be complied with for raising finance from short-term sources. If shares are to be deposited as security, because transfer deed must be prepared.Medium term finance Bank term loan This is possibly the simplest form of loans available to bus inesses. The average bank manager dealing with a medium sized firm and responsible to head office for the death penalty of the branch uses a set of well-defined criteria when making a loan. A bank loan is for a fixed amount at a fixed rate of interest. There is likely to be a demand for regular payments.The advantages of a bank term loan is that financial cookery is made easier as repayments are made in regular instalments and the interest rate are lots fixed, but the disadvantages are the smaller the business the higher rates paid due to presenting a higher gamble of things going wrong. Long term Finance Sale of Shares This is the issuing of shares of the business to other dressors who need to buy into the company.The main advantage of issuing shares is that the shareholders have limited liability if the business fails. Personal possessions are not at risk and their liability is limited to the actual pileus invested. Also the hood is raised by issuing shares (which are a proportion of what the company is worth) to investors, who are encouraged to buy by the promise of receiving dividends or earnings on their shares. Also shares can be sold as penchant shares which offer a fixed publication as profits change from year to year, according to how well the company has done.The disadvantages of covering shares are the administrative 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 press out 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 sold privately, which costs money and investors would might not want to invest due to the lack of hassle from buying into a Plc. Reinvested bread This is the money that the business makes being re-invested into the business to aid its plans.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, oddly in times of recession.Mortgage Loans This is a loan where the lender insists on some asset of the business being tied to the repayment of the loan. In the event of bankruptcy or liquidation that lender will then have priority on the money from the sale of that asset for the repayment of the loan. The asset is always land or property.The advantage of this is capital is often supplied by pension or insurance funds for a loan over 25 30 years for buildings or land, with the asset as security.The disadvantage of this the loans are usually only given when large sums are required. Venture Capital Loans Venture capital is risk capital, usually in the forms of loan and shares as a package, to provide a significant investing in a medium or large business.The advantages of this are capital is supplied by venture capital firms who accept a certain detail of risk being inevitable. Also most venture capitalists also provide help in the form of back up management and financial expertise. Also the governments Enterprise Investment Scheme offers incentives to private investors willing to invest in unquoted companies.The disadvantages are that most venture capitalists are only arouse in loans for more than 50000 and some only consider ventures where more than 250000 is involved, as the administration costs are not worthwhile on smaller projects. Also they charge a negotiation fee for arranging the finance and they generally expect a non controlling equity s pass of 20 40% in the firms capital, as a return of their investment.Debenture Loans A debenture is a long-term loan, which does not have to be repaid until an agree date. Debenture holders are entitled to a fixed rate of the return year and have priority o ver all the shareholders.The advantage of this is that individuals can supply capital to a company in the form of a long-term loan called debentures, which have to be repaid on an agreed date. These payments take priority over payments to all other shareholders.The disadvantage is that the company has to offer some security for the loan, which can be sold if the company cannot meet the payments. In the case of a fixed debenture this is a circumstantial asset such as a building or land.(Source Advantages/Disadvantages dread Industry by Ian Marcous pg 85-86, Definitions Business Studies Pg 297 301 Susan Hammond A-Z Business Studies pg 148, 167 David Lines, Ian Marcous Barry Martin)