Sources of Finance

Wednesday, February 20, 2013


Need for Finance
Firms require short-term and long-term finance for various reasons.
  • It takes a time-lag between a firm’s expenditure and its income
  • It needs money to use as working capital
  • It requires money for its capital expenditure


Sources of Short-term Finance

1. Banks
Bank overdraft is a very flexible and cheap arrangement for short-term finance. It charges interest only on the amount overdrawn.

2. Bills of Exchange
It enables traders in both home and overseas markets to obtain credit.

3. Trade Credit
Granting trade credit is a type of short-term finance, especially helpful for small firms.

4. Hire Purchase
A firm may acquire capital equipment on higher-purchase terms. The firm has to make the initial payment and to pay the outstanding amount by installments.

5. Leasing
Leasing schemes help the firms to obtain capital equipment for regular rental payments.

Sources of Long-term Finance

1. Issuing Shares and Debentures
All firms can not obtain finance by issuing shares and debentures. Private Limited Companies can issue shares privately and obtain finance. Public Limited Companies can issue shares to the general public to obtain finance.

2. Bank Loans
Banks grant loans, usually for large firms, to finance their short-term as well as long-term expenditure. In return, banks charge interest on them.

3. Retained Profits
Larger firms can retain some of their profits as a source of finance. It is normally described as ‘ploughing back the profits’.
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