Sources of business financing can be studied under the following headings:

(1) Short-term financing:

Short-term financing is needed to meet current business needs. Current needs may include paying taxes, wages or salaries, repair expenses, paying the creditor, etc. The need for short-term financing arises because sales income and purchase payments are not exactly the same every time. Sometimes sales can be low compared to purchases. Upsells may be made on credit while purchases are made in cash. Therefore, short-term financing is needed to address these imbalances.

The sources of short-term financing are the following:

(i) Bank overdraft: Bank overdraft is a widely used source of business financing. By virtue of this, the client can withdraw a certain sum of money above the balance of his original account. Therefore, it is easier for the entrepreneur to cope with unexpected short-term expenses.

(ii) Discount of invoices: Bills of exchange can be discounted at banks. This provides the invoice holder with cash that can be used to fund immediate needs.

(iii) Customer Advances: Advances are requested and received primarily for order confirmation. However, these are also used as a source of financing for the operations necessary to execute the work order.

(iv) Installment purchases: Buying in installments gives you more time to make payments. Deferred payments are used as a source of financing for small expenses that are paid immediately.

(v) Bill of lading: The bill of lading and other export and import documents are used as collateral for borrowing from banks and that loan amount can be used as financing for a short period of time.

(vi) Financial institutions: Different financial institutions also help entrepreneurs to get out of financial difficulties by granting short-term loans. Some cooperative societies can organize short-term financial assistance for entrepreneurs.

(vii) Commercial credit: It is common practice for entrepreneurs to buy raw materials, store and spare parts on credit. Such transactions result in an increase in the company’s accounts payable that must be paid after a certain period of time. The goods are sold for cash and payment is made after 30, 60 or 90 days. This allows entrepreneurs some freedom to deal with financial difficulties.

(2) Medium-term financing:

This financing is necessary to meet the requirements of the company in the medium term (1 to 5 years). These funds are basically necessary for the balancing, modernization and replacement of machinery and facilities. These are also necessary for the reengineering of the organization. They help management complete medium-term capital projects within the planned time. The following are the medium-term sources of financing:

(i) Commercial banks: Commercial banks are the main source of medium-term financing. They provide loans for different periods of time against appropriate values. At the end of the terms, the loan can be renegotiated, if necessary.

(ii) Rent purchase: Purchase by installment means buying by installment. It allows the business house to have the required assets with payments to be made in the future in agreed installments. It goes without saying that some interest is always charged on the outstanding amount.

(iii) Financial institutions: Various financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term financing. In addition to providing financing, they also provide technical and management assistance on different matters.

(iv) Obligations and TFC: Obligations and TFCs (Certificates of Financing to Conditions) are also used as a source of medium-term financing. Debentures is a company loan acknowledgment. It may have the duration agreed between the parties. The bondholder enjoys a return at a fixed interest rate. Under the Islamic mode of financing, the bonds have been replaced by TFC.

(v) Insurance companies: Insurance companies have a large amount of funds contributed by their policyholders. Insurance companies make loans and make investments out of this pool. These loans are a source of medium-term financing for various companies.

(3) Long-term financing:

Long-term finances are those that are required permanently or for more than five years of tenure. Basically, they are desired to cope with structural changes in the business or for large modernization expenses. These are also necessary to start a new business plan or for long-term development projects. The following are its sources:

(i) Capital shares: This method is the most widely used worldwide to obtain long-term financing. Equity shares are subscribed by the public to generate the capital base of a large-scale business. Shareholders share in the profits and losses of the business. This method is safe and secure, in the sense that the amount once received is only refunded at the time of the liquidation of the company.

(ii) Retained earnings: Retained earnings are the reserves that are generated from excess earnings. In times of need they can be used to finance the business project. This is also called reinvesting earnings.

(iii) Leasing: Leasing is also a source of long-term financing. With the help of leasing, new equipment can be purchased without a large cash outflow.

(iv) Financial institutions: Different financial institutions like the former PICIC also grant long-term loans to business houses.

(v) Obligations: The bonds and certificates of participation term are also used as a source of long-term financing.

Conclusion:

These are various sources of funding. In fact, there is no hard and fast rule to differentiate between short and medium term sources or medium and long term sources. A source, for example, a commercial bank can provide a short or long-term loan according to the client’s needs. However, all of these sources are frequently used in the modern business world for fundraising.