SOURCES

OF
FINANCE
LONG TERM AND SHORT TERM
SOURCES OF FINANCE

– RIYA WADHWANI
BBA 1ST YEAR 2ND SEMESTER
SOURCES OF FINANCE
• A company can raise capital from a variety of sources. Each source has
distinct features that must be properly analyzed in order to choose the
greatest accessible method of obtaining finances. For all organisations, there
is no one optimum source of funding. A choice of the source to be used may
be made depending on the situation, purpose, cost, and associated risk.
• Finance is required at the point when an entrepreneur decides to launch a
business. For example, funds are needed to buy furniture, equipment, and
other fixed assets.
LONG TERM SOURCES OF FINANCE
• It is required for investment in
fixed assets like land, building,
plant and machinery, and for
financing expansion program.
• Sources:
• Shares
• Debentures
• Long term Loans
• Retained earning
SHARES

• Share or stock is a document

issued by a company, which
entitles its holder to be one of the
owners of the company.
• A share is issued by a company or
can be purchased from the stock
market.
DEBENTURES
• Debenture may be defined as an
acknowledgement of a debt by
the company.
• Debentures are creditorship
securities which provides funds
to the company on loan basis
rather than on capital basis.
• Debenture holders are entitled to
periodical payment of interest at
a fixed rate.
LONG TERM LOANS

• A form of loan that is paid off

over an extended period of time
greater than 3 years is termed as
a long-term loan. This time
period can be anywhere between
3-30 years
• Long term loans from the
financial institutions on the basis
of collateral security.
RETAINED EARNINGS

• It is an Internal source of finance.

• It is a method of self financing by
established companies.
• The undistributed or retained
profits of the company are used
to finance the requirements of
the company.
SHORT TERM SOURCES OF FINANCE
• Short term financing deals with raising
money required for a short period, i.e.
less than one year.
• It is raised to meet the short term
working capital requirements of the
business.
• SOURCES:
• Trade Credit
• Installment Credit
• Customer Advance
• Bank Credit
1. TRADE CREDIT

• Trade credit refers to credit granted to

manufactures and traders by the suppliers of
raw material, finished goods, components,
etc.
• Usually business enterprises buy raw
material on a 30 to 90 days credit. This means
that the goods are delivered but payments are
not made until the expiry of period of credit.
This type of credit does not make the funds
available in cash but it facilitates purchases
without making immediate payment.
• This is quite a popular source of finance
2. BANK CREDIT

Commercial banks grant short-term finance to

business firms which is known as bank credit.
When bank credit is granted, the borrower gets
a right to draw the amount of credit at one time
or in installments as and when needed.
Bank credit may be granted by way of:
loans,
cash credit,
overdraft
discounted bills.
a) BANK LOAN
• When a certain amount is advanced
by a bank repayable after a specified
period, it is known as bank loan.
• Such advance is credited to a
separate loan account and the
borrower has to pay interest on the
whole amount of loan irrespective of
the amount of loan actually drawn.
• Usually loans are granted against
security of assets.
b] CASH CREDIT
• It is an arrangement whereby
banks allow the borrower to
withdraw money up to a specified
limit. This limit is known as cash
credit limit.
• Initially this limit is granted for one
year. This limit can be extended
after review for another year.
However, if the borrower still
desires to continue the limit, it
must be renewed after three years.
c] OVERDRAFT FACILITY
• When a bank allows its depositors
or account holders to withdraw
money in excess of the balance in
his account up to a specified limit, it
is known as overdraft facility.
• Interest is charged only on the
overdrawn money.
• Rate of interest in case of overdraft
is less than the rate charged under
cash credit.
d] DISCOUNTING OF BILLS
• Under this type of lending, Bank takes
the bill drawn by borrower on his
(borrower's) customer and pays him
immediately deducting some amount
as discount/commission. The Bank
then presents the Bill to the
borrower's customer on the due date
of the Bill and collects the total
amount. If the bill is delayed, the
borrower or his customer pays the
Bank a pre-determined interest
depending upon the terms of
transaction.
3. CUSTOMER ADVANCES
• Sometimes businessmen insist on their
customers to make some advance payment.
• It is generally asked when the value of order
is quite large or things ordered are very
costly. Customers’ advance represents a part
of the payment towards price on the product
(s) which will be delivered at a later date.
• Customers generally agree to make
advances when such goods are not easily
available in the market or there is an urgent
need of goods. A firm can meet its short-
term requirements with the help of
customers’ advances.
4. INSTALLMENT CREDIT
• Installment credit is now-a-days a
popular source of finance for
consumer goods like television,
refrigerators as well as for industrial
goods.
• Only a small amount of money is paid
at the time of delivery of such articles.
The balance is paid in a number of
installments.
• The amount of interest is included
while deciding on the amount of
installment.