Financing can be either long-term or short-term. As is obvious, long-term financing is more expensive as compared to short-term financing. There are different vehicles through which long-term and short-term financing is made available. This chapter deals with the major vehicles of both types of financing.
The common sources of financing are capital that is generated by the firm itself and sometimes, it is capital from external funders, which is usually obtained after issuance of new debt and equity. This mix is applicable to the assets that are to be financed as closely as possible, regarding timing and cash flows. Some of the major methods for long-term financing are discussed below.
Equity financing includes preferred stocks and common stocks. This method is less risky in respect to cash flow commitments. However, equity financing often results in dissolution of share ownership and it also decreases earnings.
The cost associated with equity is generally higher than the cost associated with debt, which is again a deductible expense.
Therefore, equity financing can also result in an enhanced hurdle rate that may cancel any reduction in the cash flow risk. A corporate bond is a special kind of bond issued by any corporation to collect money effectively in an aim to expand its business. This tern is usually used for long-term debt instruments that generally have a maturity date after one year after their issue date at the minimum.
Some corporate bonds may have an associated call option that permits the issuer to redeem it before it reaches the maturity. All other types of bonds that are known as convertible bonds that offer investors the option to convert the bond to equity. Capital notes are a type of convertible security that are exercisable into shares. They are one type of equity vehicle. That is why the entire consideration the company aims to receive, for the future issuance of the shares, is generally paid at the time of issuance of capital notes.
Many times, capital notes are issued with a debt-for-equity swap restructuring. Other sources of finance are long term and can be paid back over many years. Internal sources of finance are funds found inside the business. For example, profits can be kept back to finance expansion. Alternatively the business can sell assets items it owns that are no longer really needed to free up cash.
External sources of finance are found outside the business, eg from creditors or banks. Sources of external finance to cover the short term include: Sources of external finance to cover the long term include: Ways to finance a business Some sources of finance are short term and must be paid back within a year.
Short-term sources of external finance Sources of external finance to cover the short term include: An overdraft facility - where a bank allows a firm to take out more money than it has in its bank account. Trade credits - where suppliers deliver goods now and are willing to wait for a number of days before payment.
Factoring - where firms sell their invoices to a factor such as a bank.
Short term finance in business usually refers to the additional money a business requires for doing its business for short terms, which is usually a maximum period of one year. Some main sources of short term finance are bank overdrafts,trade credit, factoring, credit card, lease and bank loans.
Sources of Short-Term and Long-Term Financing for Working Capital. A constant flow of working capital is an intrinsic component of a successful business.
This is a source of short term business finance lent for a specific period of time to a business to pay for goods that they have received. Trade Credit cycle usually runs for a period of 28 days. But sometimes businesses may not pay back the loan for much longer durations. Short term finance refers to financing needs for a small period normally less than a year. This type of financing is normally needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory, accounts receivables etc.
Short Term Sources of Finance. Short term financing means financing for a period of less than 1 year. The need for short-term finance arises to finance the current assets of a business like an inventory of raw material and finished goods, debtors, minimum cash and bank balance etc. Short-term financing is also named as working capital financing. 3 The Advantages of Short-Term Debt; 4 The Sources of Finance Available to a Business; "List of Different Sources for Short-Term Business Financing." Small Business.