Sources of corporate finance can be examined under the following headings:
(1) Short-term funding:
Short-term financing is needed to meet the current needs of the businesses. Current needs may include payment of taxes, salaries or wages, repair costs, payments to creditors, etc. The need for short-term financing arises because sales proceeds and purchase payments are not always exactly the same. Sometimes sales can be low compared to purchases. Further sales can be made on credit while purchases are made for cash. Therefore, short-term financing is needed to correct this imbalance.
Sources of short-term funding are as follows:
(i) Bank overdraft: Bank overdrafts are a common source of financing for businesses. Under this, the customer can withdraw a certain amount of money over and above his original account balance. This makes it easier for the entrepreneur to cover unexpected expenses in the short term.
(ii) Bill discounting: Bills of exchange can be discounted at the banks. This provides the bill holder with cash that can be used to fund immediate needs.
(iii) Deposits from customers: Advances are primarily requested and accepted for order confirmations, but also serve to finance the processes necessary to carry out the work order.
(iv) Installment purchase: When buying in installments, you have more time to pay. The deferred payments serve as a source of funding for small expenses that need to be paid immediately.
(v) bill of lading: Bills of lading and other export and import documents are used as a guarantee for borrowing from banks and this loan amount can be used for financing for a short period of time.
(vi) Financial Institutions: Various financial institutions also help business people get out of financial difficulties by providing short-term loans. Certain cooperatives can arrange short-term financial aid for business people.
(vii) Trade Credit: It is common practice for businessmen to buy raw materials, supplies, and spare parts on credit. Such transactions lead to increasing liabilities of the company, which have to be settled after a certain period of time. The goods are sold for cash and payment is made after 30, 60 or 90 days. This gives businessmen some freedom in dealing with financial difficulties.
(2) Medium-term financing:
This funding is required to meet the company’s mid-term (1-5 years) needs. Such funds are basically needed for the balancing, modernization and replacement of machines and systems. These are also required for the re-engineering of the organization. You will support management in completing mid-term capital projects on schedule. The following are the sources of medium-term funding:
(i) commercial banks: Commercial banks are the most important source of medium-term financing. They offer loans for different periods of time against appropriate collateral. After the terms have expired, the loan can be renegotiated if necessary.
(ii) Installment Purchase: Hire purchase means purchase on installments. It enables the business building to have the required goods with payments to be made in the future in agreed installments. Needless to say, some interest is always charged on the outstanding balance.
(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc. also offer medium and long-term financing. Besides providing financial resources, they also provide technical and administrative support on various matters.
(iv) Notes and TFCs: Debt securities and TFCs (Terms Finance Certificates) are also used as a source of medium-term financing. Debentures are a confirmation of the company’s loan. It can be of any duration depending on the agreement between the parties. The bondholder benefits from a return at a fixed interest rate. Under the Islamic mode of financing, bonds have been replaced by TFCs.
(v) Insurance companies: Insurance companies have a large pool of funds contributed by their policyholders. Insurance companies grant loans and invest from this pool. Such loans are the source of medium-term financing for various companies.
(3) Long-term financing:
Long-term finances are those that are required to be permanent or for a term longer than five years. They are fundamentally desirable in order to do justice to structural changes in the company or in the case of high modernization costs. These are also required for the initiation of a new business plan or for long-term development projects. Below are his sources:
(i) Shares: This method is the most commonly used around the world to raise long-term financing. Shares are subscribed to by the public to create the capital base of a large corporation. The shareholders share the company’s profits and losses. This method is safe and secure in the sense that the amount once received will not be returned until the moment the company is dissolved.
(ii) retained earnings: Retained earnings are the reserves generated from the excess earnings. In times of need, they can be used to fund the business venture. This is also referred to as a payback.
(iii) Rental: Leasing is also a source of long-term financing. With the help of leasing, new devices can be purchased without a large outflow of money.
(iv) Financial Institutions: Various financial institutions, such as the former PICIC, also provide long-term loans to commercial houses.
(v) Debentures: Debt securities and participation certificates are also used as a source of long-term financing.
These are different sources of funding. In fact, there is no hard and fast rule to distinguish between short- and medium-term sources, or medium and long-term sources. A source, such as a commercial bank, can provide both a short-term and a long-term loan, depending on the needs of the customer. However, all these sources are widely used in the modern business world to obtain finance.