Types of Business Finance For Business

There are following three types of business finance:Business finance refers to the funds that are required to start, operate, and grow a business. There are different types of business finance available to entrepreneurs and business owners, including:

Types of Business Finance For Business.

Business Finance

Short term Finance

Medium term Finance

Long term Finance

  1. SHORT-TERM FINANCE:

The borrowing or lending of funds for the period of one year or less is known as short-term finance. Main features of short-term finance

are:

  • Available at low rate of interest.
  • Seasonal requirements of business can be met easily.
  • No need to keep heavy cash balance.
  • It is considered blessing for unforeseen expenditures.

SOURCES OF EQUITY FINANCE

  • Loan by Owner:

Sometimes the owner or partner of the business concern provides short-term loan to business in the hour of need from his personal sources in addition to contributed capital.

  • Advance Payment by Owner:

If the owner wants to buy the goods, produced by his own business, for domestic or personal use then he can provide short-term finance to business by making total or partial payment in advance.

SOURCES OF DEBT FINANCE

  1. Commercial Banks:

These banks receive the savings of public as deposits and lend them to the businessmen for short period. These loans are granted in shape of overdraft and cash credit (Running Finance).

  1. Friends & Relatives:

A number of persons obtain loan from friends or relatives in the time of need, but it is limited and indefinite.

  1. Indigenous Bankers:

This type of source includes, small money lenders i.e. Sahukar, Mahajan, Zamindar, who grant loans on high rate of interest.

  1. Public Deposits:

Some commercial units receive deposits from the public for short period on very favourable terms. Thus they are in the position to utilize these funds for their business requirements.

  1. Co-operative Societies:

These societies render valuable services in providing loans to rural businessmen against the security of land.

  1. Trade Creditors!

Trade creditors include wholesalers, retailers and manufacturers who supply goods on credit basis to the traders.

  1. Customers:

Sometimes customers provide short-term funds by making advance payment of goods before their delivery.

  1. Factors:

They grant credit on the security of account receivables. Thus they take over the risk of bad debt losses.

  1. MEDIUM-TERM FINANCE:

If borrowing or lending is made for one to 10 years, it is called medium term or intermediate financing. Some other banking experts say that the period of intermediate finance is one to 5 years. Main features of medium-term finance are as under:

  1. It is required to purchase new machinery or equipment.
  2. If an entrepreneur wants to introduce new product.
  3. For renovation work including repair, improvement, alteration

and addition to plant.

SOURCES OF EQUITY FINANCE

  • Loan by Owner:

The sole owner in sole tradership and partners in partnership business provide medium term loans from their personal sources in case of capital deficiency. Moreover, the business concern does not require to fulfill any legal formality in this regard.

  • Other Sources:

In some business units, the directors, managing agents and officers may provide loans to business for medium term.

SOURCES OF DEBT FINANCE

  • Life Insurance Companies:

Insurance companies have steady or regular income in form of premium, so they grant medium-term finance to industrial units and businessmen.

  • Partial Payment Method:

Some manufacturers sell their goods on both cash and installment basis. Some portion of the price is paid at the time of goods purchased and the balance is partially paid or on installment basis. This method of buying goods is also a source of getting medium term finance.

  • Agents:

Sometimes managing agent also provides or arranges medium term finance for the concerned business due to their vast contacts in business community.

  • Financial Institutions:

The financial institutes of a country grant medium term finance to the businessmen (e.g.) IDBL and ZTBL etc. in Pakistan.

  • TFC’s:

The company in the favour of lending institutions issues term Finance Certificates. The mark up on the money borrowed paid in instalments.

  1. PTC’s:

A company for meeting its medium term finance requirements issues participation term certificates. The instrument is issued to replace debenture financing.

  • LONG-TERM FINANCE:

Long-term finance is generally obtained for more than ten years some other experts argue that the period of long term finance is more than five years. Following are the main features of long-term finance.

  • It is used for the purchase of permanent or fixed assets such as land, building, plant and machinery etc.
  • It is generally needed to start a big business.
  • Higii rate of interest is charged.

SOURCES OF EQUITY FINANCE

  • Reserve Fund:

A company does not distribute its total profit among the shareholders. It transfers a part of profit earned to reserve fund every year to meet the unexpected expenditures in future.

  • New Partners:

Inviting new partners in a firm and issuing new share in a company can increase the volume of capital.

  • Underwriters:

Their services cannot be ignored in obtaining long-term loans lor public limited companies. They take the responsibility to dispose of the securities of companies and receive commission.

  • Musharika Investment:

Musharika certificates also meet the capital requirements of a business and profit is distributed according to agreed ratio.

  • Modaraba Certificates:

Long-term loans are obtained by issuing modaraba certificates, which may be used for specific or multiple purposes.

SOURCES OF DEBT FINANCE

  1. Bonds:

Under this scheme, large size businesses units issue secured and unsecured bonds, which may be disposed of directly or through agents.

  1. Debentures:

The debentures are also issued to avail long-term finance against the assets of company. The interest and time period for their redemption is also fixed.

  1. Mortgage:

These loans are obtained from financial institutions against the security of immovable property like land and building etc.

  1. Financial Institutions:

The specialized financial institutions of the country provide long­term finance to different industries and sectors. For example, ZTBL and IDBL in Pakistan.

  1. Leasing:

In leasing the lesser transfers the rights of using an asset to lessee for a specific period of time. The ownership of asset remains with the lesser. The lessee pays the lease rentals according to agreed terms.

Final Recommendation On Types of Business Finance.

  1. Debt financing: This involves borrowing money from lenders, such as banks or other financial institutions. The business owner must pay interest on the amount borrowed, and the loan must be repaid within a specific period of time.
  2. Equity financing: This involves selling shares of ownership in the company to investors in exchange for funds. The investors become partial owners of the company and share in its profits and losses.
  3. Crowdfunding: This involves raising funds from a large number of people, typically through an online platform. The funds can be in the form of donations, rewards, or equity in the company.
  4. Grants: This is a type of funding provided by governments, foundations, or other organizations to support specific projects or initiatives.
  5. Angel investment: This involves individual investors who provide funding to early-stage startups in exchange for equity in the company.
  6. Venture capital: This involves investing in startups or early-stage companies with high growth potential in exchange for equity. Venture capitalists typically provide a higher amount of funding than angel investors and are more involved in the company’s operations.
  7. Personal savings: This involves using personal funds to start or grow a business. This can include savings, retirement funds, or other personal assets.

Each type of business finance has its advantages and disadvantages, and entrepreneurs must consider their goals and financial situation when choosing the best option for their business.

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