The source of finance that is the issue of from where to get funds to start, develop or expand a business is very important for the future of the business. Success of business and its operations depends largely on choosing the proper sources of finance and the purposes for which the fund is sought. For this reason study of different available sources, their advantages, limitations in respect of cost, period of time, rate of return, usability of funds and outcome of the funding repayment etc are crucial to a business specially for corporate sectors. And as such it is also important to understand how appropriate these sources are to the purpose of the business.
Types of sources
Business funding can be categorised as internal and external sources of business according to its relation with the business holders or the business itself. The fund could be available for use for a different period of time relating to its availability and need of purpose. Regarding the time of its usable period and repayment it can be categorised as short, medium and long term sources of finance. It is important to choose the appropriate source of finance for the purposes the finance is made.
The details of sources that has been open to the business of a limited company, their advantages, risks involved etc has been discussed below:
Funds that are available for a period of less than a year are called the short term sources. However, the main sources for the type remains the debts that is loans from the banks and other financial institutions. Short term loans are used to meet the day to day operations of business while there is difficulty for cash flow-for example.
In terms of finance bank is loan is the widest most flexible and better way of short term finance. Purposes such as working capital, production expenses for the goods that are ordered by the customer bank loan can be a good source for financing.
|Advantages |Disadvantages | |It is easy to get, terms are flexible and can be repaid at any time.|The disadvantages are its limitation of the amount, credibility and | |In reality the interests are calculated on daily product. So as soon|conditions of its usage etc. | |as the money is repaid there is no further cost. |It may not be possible to use the money properly. The cost is high. | |It can be used for any purposes that a business may come to need. |Too much borrowing can be dangerous as well. | | |There might be deadline to repay. |
Business does not always receive money directly from the sales. Sometimes it has to sell on credit while it will definitely get the money after a period of time. But before that may has to pay a bill while there is no extra money for that. In this situation a business can arrange an overdraft facility with its bank.
|Advantages |Disadvantages | |Easier to get, flexible. |High cost especially while the bank risks of its return. | |No charge when not availed. |Cause extra burden to the business and may face a hefty bill if | |Good for short term usages |exceeded. |
Many businesses buy things on credit while they have 28 days to pay the bill. In cases it can be extended for more time for example 6 months to one year. To the business this is a kind of loan and the business has the opportunity to pay it back on a suitable time...