Finance is the essential ingredient of the business. Insufficiency or lack of cash can create a hazard for a business. Without cash an enterprise struggles to survive. Various sources of finance help fulfill the needs of wages, advertising, expansion, payment of hobbies etc (Take great pride in et. al, 2009). Different sources of finance are used depending after their maturity period. Each source has its advantages and disadvantages.
Sources of finance
The resources of finance are extensive classified in to the following:
Long term Finance
Medium term finance
Short term finance
Long Term Resources of Finance
Long term sources of financing are those methods that are implemented to provide money for an extended period of your time. This time frame must be of one year and above. Long run sources are usually complicated and are usually used to fund pursuits like choosing acquisitions, product extensions, or buying up of new premises etc. Example of long term financing carries a 40 year mortgage loan or a 10 12 months treasury word. The resources of long term finance are:
Debentures
Debentures are the long term lending options raised from general public by a Consumer limited company. These debentures are usually ranged from 0. 01$ to 100$ with assorted interest rates. Debentures are floated with certain terms and conditions and tend to be secured resistant to the assets of a company (Chakraborty, 2004).
Advantages of debentures
Debentures are a well suited mode of long-term financing as the interest payable on debentures is made before taxation.
Another advantage of debenture is they are payable even though the company will not produce earnings.
Issue cost of debenture is low as compared to that of desire capital and collateral.
Disadvantages of debentures
As mentioned previously, certain conditions and conditions are set out for debentures. Inability to meet those conditions, like interest and principal repayment requirement, can result in not only financial and public humiliation but can also lead to individual bankruptcy.
Debentures are influenced by the inflation rates. If, by chance the inflation rate significantly drops down, then the real cost of your debt will become higher than what was initially arranged (Chandra, 2008).
Convertible debentures
Convertible debentures offer the benefit of quick conversion of debt into equity. Convertible debentures act like the standard debentures in conditions of rates of interest specification and the principal repayment, except that in convertible debentures the customer gets the option of switching them into company's issuing talk about at a pre made a decision ratio.
Convertible debentures are being used by the firms to attract investors. Like the Essar metallic, India issued convertible debentures in conjunction with warranty and loyal coupons as well as optionally totally convertible debentures to catch the attention of shareholders (Nidheesh, 2009).
Advantages of convertible debentures
Convertible debentures are favorable for the issuing company as they feature low interest payments when compared with the traditional personal debt.
For investors they give a secure method of investment through involvement in the commodity and guaranteed promotion payments.
There will be no capital gains duty for the holders of convertible debenture.
Disadvantages of convertible debentures
In case of individual bankruptcy, the debenture holder has a low priority state on the company's asset as compares to the straight debt holders.
The Valuation techniques for convertible debentures are a lttle bit tricky and could require additional scrutiny (Hanif, 2001)
Common Stock
Common stock is a long-term security that is given to the owners of the business.
Advantages of common stock
Common stock offer several advantages.
Common stocks and options are liquid i. e. they can be easily and commonly bought and sold.
The risk associated with common stock is very less as it is only limited to the original cash investment made.
They are tagged to be high returners as compared to the other resources of investment.
Disadvantages of common stock
The owners of common stock are previous to be paid in the business after payments to employees, suppliers, creditors etc.
The stock prices are usually unstable, that is they rise and fall quickly. Therefore the investors must be vigilant in this respect.
Preference shares
Preference shares refer to those shares that offer a fixed ratio of dividends that is paid instead of the common stocks to the stock holders.
Advantages of inclination shares
There advantages are:
In preference stocks the company is not pressured to pay the dividends in the period when the profits are poor.
Preferred shareholders get their repayments first when compared with the normal stock holders in event of individual bankruptcy.
Disadvantages of preference shares
They are riskier, as unlike other instruments, they aren't secured against the assets of the business.
The interest produce on preference stock is low as compared to the loan stock
In case of non-payment the preferred stock holders, unlike debenture holders cannot require a receiver for the boasts (Carter et. al, 1997).
Mortgage
A mortgage loan is a long-term source of money that is given by the customer to the lending company in trade for the security of the true estate property. You can choose between a set rate and variable rate mortgage loan depending upon one's risk bearing capacity, financial health and other requirements.
Advantages of mortgage
The mortgage funding makes the borrowing adaptable and affordable as it provides ownership of real estate along with the provision of financial aid.
The interest on mortgage is free of tax.
The fixed schedule of mortgage payments allows you to plan up your cash flux and plan the needs you have and requirements appropriately.
Disadvantages of mortgage
The default risk is high in case of home loan.
The mortgage conditions and conditions requires for guarantee to be penned as security. The lending company has the right to declare on the security in case there is default payments.
Finance Strategy: Financing simplified for you
Government grants or loans/loans
Government grants are of great assistance to the entrepreneurs in terms of providing the financial endure. Many of the government organizations can enough to fund the young entrepreneurs to help them develop the right strategy for their business. The government organizations' grant isn't just limited by the strategic thinking phase, in addition they help the business people in putting the plan to actuality and also helping the stat up costs (Gruber, 2009).
Advantages of Federal grants
The government grants or loans are often and readily available for a small business idea. Although an extended application process is engaged, yet the process is a lot quicker than the other lenders. Like SBA (SMALL COMPANY Association) approves a loan in 3-5 business days and nights.
The interest rate is lower for government grants or loans especially in case of student loans.
Disadvantages of Federal government grants
The element of bureaucracy is usually engaged to plan for the grants
The government corporation giving the money, try to exert affect on the business enterprise management.
The grantee is subjected to tougher terms and conditions to become entitled fot the offer.
Retained Profit
Retained profit entails allocation of benefit from a preexisting business to be reinvested into the same business for the intended purpose of financing. This money can be used to buy new equipment, equipment, raw materials and other such type of investments.
Advantages of retained profit
This type of self funding helps the company to hold up against any contingency requirements and uncertainties or even a calamity.
The cost of increasing finance from outside the house source is saved through the maintained revenue move.
There are no long legal formalities involved in this kind of financing.
Disadvantages of retained profit
Some companies falsely use the maintained profit as a means of manipulating the worthiness of stocks and dividends.
Improper use of maintained profit in risky adventures may lead to a reduction. (Rajni and Hiro, 2008)
Medium term sources of finance:
Medium term funding or intermediate financing is done for an interval intermediate between 1 to a decade. Medium term financing is normally done for the intended purpose of maintenance or up gradation of the business enterprise like creating improvements in the plant, buying up of fresh material, assets and equipment. The resources of medium term funding are:
Loans
Loans are a way of providing long term financing for activities such as buying of permanent assets like vegetable and equipment, financing up of working capital and or covering losses.
Advantages of loans
Through loan, the financing is guaranteed for the life span of a loan. You can purchase a loan for nearly everything now.
Loan allows you to make things affordable.
You can match the term of your loan to the life of a secured asset you want to get. For instance you can take financing of three years for a machine whose working life is three years.
Disadvantages of loans
If you miss a payment, things might get problematic for you that may include penalties or even your property possession.
It is a long term commitment. Some bankers offer repayment service but they demand extra fees for repayments.
Venture Capital Trust
Venture capital trust identifies those companies that are shown on the London stock exchange, and are in search of investors to raise an collateral capital around 10 to 30 million pounds. The VCT managers are given 3 years to get cash, glitz and bonds into different companies.
Advantages of capital raising trust
VCT's are specifically well-known for providing tax productive investment.
They provide free of tax dividends
Offer Free of tax capital growth
Disadvantages of capital raising trust
The VCT investment method has higher risk organizations as compared to life insurance account, collectives and other settings. The major dangers are:
The Unquoted companies (UK Smaller Companies)
Liquidity issues (capability to sell shares)
Market timing risk
Leasing
A rent in arrangement of purpose signed for a particular time frame, conveying the use of a particular tool. Leasing is preferable when the expense of purchasing equipment is greater than the price of leasing. The lessee gets the rights to work with the equipment in trade of rental payments to the lessor.
For example in the golfing industry, the golf operators use leased golf automobiles, leased golfing aeration equipment, mowing machines etc.
Advantages of leasing
In lease funding the interest rate is set throughout the course of payment
Leasing assists with the conservation of capital as it generally does not put together any requirements of deposition of cash at the beginning.
Leasing a house is much simpler as compared to mortgage financing. (Schmidgall, 2004)
Disadvantages of leasing
In lease you have to endure the cost of equipment maintenance as given, when you are not even who owns the gear.
Lease payments should be paid till the termination of the initial term period. So even if a lessor is facing a downturn he's still supposed to make the obligations that may be troublesome.
Hire Purchase
Nowadays, machines move vehicle, equipment etc are bought through seek the services of purchase. Ownership of the nice is transferred to the hirer but the ownership is only given following the previous installment has been paid. Hirer can also choose to repay all the installments in one go.
Advantages of employ the service of purchase
The hirer is not destined in case of hire purchase. How can either await the full repayment term or can go for the purchase by paying the total amount simultaneously.
The cost of equipment under seek the services of purchase is less when compared with leasing.
They have little statutory control
Disadvantages of work with purchase
The cost of maintenance is to be burnt by the hirer thus lowering his profit margin.
20 to 25 percent advance payment has to be paid to the vendor at the time of hire purchase agreement. ( Maheshwari, 2003)
Business Angels
Business angels refer to those people which may have a lot of money that they are looking to make investments somewhere. They can be one step ahead of friends, family founders etc.
Venture Capitalists
Friends
Founders and family
High Risk Lower (But nonetheless somewhat risky)
(Source: Sources of financing for Australia's Entrepreneurs by Howard Frederick, Siri Terjesen, pp. 30)
Advantages of business angels
As set alongside the financial institutions, elevating cash through business angels is beneficial as it does not require high fees.
Business angels offer different investment conditions from other devices, offer longer investment opportunities, convenient investment procedures and lower targeted rate of returns.
Disadvantages of business angels
Business angels try to make there say in functions of the business enterprise, and can also have an impact on the business skills, their value and their contribution.
There is a brief history of a small proportion of business angels turning out be devils, satisfying their own motives somewhat than contributing in to the good of the business
Business angels, unlike the business capitalist are less prefer to re investment in the same business (Frederick and Terjesen, 2007).
Short term resources of finance:
The money needs for under per year are fulfilled through short-term financing. They provide a cash influx or the fulfillment of short term inventory needs and repairs as well as short term investments. For instance suppliers like Wal-mart use short term financing to build up their inventories before peak advertising periods. The sources of short term money are:
Bank Over drafts
Bank overdrafts are a short term medium of financing that fulfills the contingency needs of the business specifically for the alterations in the fluctuations of cash flow and sudden requirements.
Advantages of lender overdrafts
Over draft is a simple and supple means of financing
The interest is chargeable on the everyday overdrawn amount.
Disadvantages of standard bank overdraft
The loan company can call for repayment at any time.
Cannot be borrowed for bigger amounts
The rate of interest for loan provider draft is higher than that for loans.
Trade credit
Trade credit is the easiest source of funding, where in fact the suppliers of your business enable someone to take the material with the versatility of earning the payment down the road. So whenever materials equipments etc are taken without on-spot cash repayment, trade crediting is involved.
There are certain conditions and conditions involved in trade crediting and depending on those conditions the crediting can be costly. Including the terms involved with purchasing supplies from a supplier on trade credit is 3 percent cash discount within 12 days and nights and a world wide web date of thirty days. By this the provider is financing you two percent discount on price within those 12 times. However, by using the trade credit advantage you are conserving your cash for 18 more days. If we estimate on an total annual basis the 3 percent discount missed might cost you more.
Advantages of trade credit
Trade credit is quickly and easily available, since the suppliers are up for a small business easily
If the company is facing any financial flops, Trade credit sourcing may be beneficial as the suppliers are lenient in supplying finances.
Usually no or nominal security or warranties are required in case of trade credit
Disadvantages of trade credit
The quitting of the money discount made available from the suppliers, in case of early payment, could possibly be the biggest drawback when planning on taking up trade credit,
The firms credit rating may get afflicted through trade crediting (Shim and seigel, 2007)
Factoring
Factoring is a source of financing that is situated upon the business enterprise fantastic invoices. It works in the way that the business sends a backup of the invoice received from the client to the factor. The factor compensates a place amount of the invoice value that always makes 80 to 85 percent of the quantity to be paid. This repayment is easily done usually within twenty four hours. However, a little quantity of invoices make the factoring uneconomical. Companies which may have a turnover rate of 200, 000 pounds and above can utilize the factoring.
For example in India, several procedures have been used for factor development. Like the State lender of India produced SBI Factors and commercial services limited in a variety of claims of India to help the tiny scale businesses who have been suffering the shortage of capital. (Page 81)
Advantages of factoring
Factoring assists with the improvement of the companies' credit management
Factoring enables a continuous inflow of funds
Factoring can be of great gain particularly in case there is need.
Disadvantages of factoring
Among different forms of short term financing, the cost of factoring is higher than others
Factoring may ruin the good will of the company from clients viewpoint, as he may see it as an indicator of financial weakness (Banjerjee, 2005)
Invoice Discounting
Invoice discounting is very similar to factoring except for a difference. In factoring the 3rd party approaches the client for the settlement of invoices and manages the other business details. However in invoice discounting the customers are totally unacquainted with your financing connections. The company itself sustains responsibility for the ledgers and invoice handling.
Advantages of invoice discounting
As the clients are unaware, therefore the company's goodwill is not much affected
As the money is easily available it can be used for future opportunities and fund other orders
The management no more need to spend time on unpaid accounts and can utilize their amount of time in planning elsewhere
Disadvantages of invoice discounting
Terminating the arrangement can be difficult in case there is invoice discounting
Disputed invoices can sometimes pose an issue and should be carefully dealt with.
Conclusion
So whether you are thinking of establishing a fresh business or extending the existing one, money will be the first and the main requirement. One should always properly assess the business resources for financing, as some resources may be ideal for business money and other might not be. For example setting up a road part coffee stall requires different kind of financing than establishing a garment industry business.
But for many business the issue is not only to identify the right source of money but also to find where to get the cash for setting up, expansion purpose and likewise. It is therefore imperative to examine the various way to obtain financing open to a business and assess extensively the appropriation of the resources with regards to the business. Investment readiness is actually needed. A rich and beneficial financial program should, therefore, be chosen as it is not only the question of money, but also the question of the whole of the life routine of the business.
