The sources of the business funds can be classified into
three group:
1. Short term finance.
2. Long term finance.
3. Medium term finance.
1.
Short term finance:
When
the owner has not enough money to meet current expenses like payment to
creditors salaries. Rent and measure etc. He can borrow the amount from others.
The revenue may be receipt after some time. But the expenses are paid on daily
basis. Therefore, the sources of short term finance are used meet the business
obligation.
Sources:
i.
commercial bank:
The banks
provide O/D facility for few months. It is used to pay the current liabilities.
The commercial bank also provides “cash credit” and loan for the business.
ii.
Finance corporations:
The
finance corporations help the business by rendering short term funds. There are
small scale organizations as compared to the commercial banks.
iii.
Trading bills:
The
export and import trading bills can negotiated and discounted to provide funds
in advance o actual due date of the settlement by some business people.
iv.
Customer advances:
The
customer can supply short term funds. The customer can makes full payment or
particle for goods before receiving the delivery of goods.
2.
Long term finance:
Long
term finance is usually for permanent basis. The owners provide funds on
payment basis and the creditors through long term funds.
Sources:
i.
Capital:
The
amount contributed by the owner is used in the business. The large amount is
provided in the shape of capital. Additional amount can also be provided by the
owner.
ii.
Retained profit:
The
profit retain in the business can built up funds of the business. The retain
profit income can be used in business or may be to earn further.
iii.
Issue of right shares:
A
public company can increase its capital by issue of right shares. The right
shares are offered to the share holders in proportionate to their present
holding often at a price which is a less than the current price in the stock
exchange.
iv.
Debentures:
The
debentures are long term loan against of the assets of the company. The rate of
interest is fixed. The time period of repayment of debenture is also fixed.
v.
Ploughing back of profit:
Ploughing
back of profit means the use of profit of the business for its development.
Ploughing back of profit is a useful source of getting extra capital for
building and expansion of the business. In ploughing back of profit, there is
no problem of taking loans and no burden of interest on the business.
3.
Medium term finance:
Medium
term finance is defined as money raised for a period from one to five years. It
is required for the repair and modernization of the machinery.
Sources:
i.
Commercial banks:
Commercial
banks are now the important source of providing medium term loans. Loans are generally
given against some securities of assets, the loan is credited to account of
borrowers. He can withdraw the whole amount on installment basis.
ii.
Debentures:
A
company may raise a part of medium term capital by issuing debentures. It is an
instrument issue by the company acknowledgement debt under its common seal. The
terms and conditions of loan are written on the documents.
iii.
Loans from specification institutions:
Medium term
finance are also provided to the business concerned of specialized credit
institutions like (PLCLC, IDBP, ADBP) etc.
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