Sources of Corporate Finance

Sources of Corporate Finance

Sources of corporate finance can be studied under the following headings.

Short term Funding.

Short term funding is necessary to meet current business needs. Current needs may include payment of taxes salaries or wages repair costs creditors payment etc. The need for short term funding arises because sales revenue and purchase payments are not quite the same at all times. Sometimes sales can be low compared with purchases. Additional sales may be on credit while purchases are made in cash. So short term financing is needed to match these irregularities.

Sources for short term funding are as follows.

Overdraft Transfer. Overcrowding in the bank is highly used to the source code for corporate finance. Under this client you can draw a certain amount of money in addition to his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses.

Discounting of bills. Bills can be discounted at banks. This provides cash to the holder of the bill that can be used to finance immediate needs.

Advances from Customers. Advances are primarily required and received for confirmation of orders. These are also used as sources of funding for the measures required to implement the rules of procedure.

Deposit Purchase. Purchase on installment gives more time to pay. The deferred payments are used as a source of funding for small costs to be paid immediately.

Invoice. Invoice and other export and import documents are used as a guarantee to borrow from banks and the loan amount can be used as financing for a short period.

Financial institutions. Various financial institutions also help businessmen to face financial difficulties by providing short term loans. Some cooperative societies can provide short term financial support to businessmen.

Trade credits. It is common for businessmen to purchase raw materials stores and spare parts on credit. Such transactions result in increased trade payables for the business to be paid after a certain period of time. The goods are sold in cash and payment takes place after 30 60 or 90 days. This allows some freedom for businessmen to face financial difficulties.

2 Medium term financing.

This funding is necessary to meet the medium term 1 5 year requirements of the business. Such finances are essential for balancing modernizing and exchanging machinery and facilities. These are also necessary for the restructuring of the organization. They help management to complete medium term capital projects within scheduled time. The following are the sources of medium term funding.

Rent Purchase. Rent purchase means buying on interest. This allows the business house to get the required goods with payments to be made in the future in agreed installments. It does not have to be said that any interest is always charged on outstanding amounts.

Financial institutions. Several financial institutions such as small and medium sized banks industrial development banks etc. also provide medium and long term finances. In addition to providing economics they also offer technical and administrative support in various issues.

Bonds are a receipt for loans from the company. It may be for some time agreed between the parties. The publisher has a fixed interest rate. Insurance companies have a large pool of funds contributed by their policyholders. Insurance companies grant loans and make investments from this pool. Such loans are the source of medium term financing for different companies.

3 Long term financing.

Long term finances are those required permanently or for more than five years of service. They are fundamentally desirable to face structural changes in business or heavy modernization costs. These are also necessary to initiate a new business plan or for long term development projects. The following are its sources.

This method is used most worldwide to increase long term financing. Shares are subscribed by the public to generate the capital base in a large scale business. Shareholders shareholders share profit and loss of business. This method is safe and secure in the sense that the amount received once only is paid back at the time of the companys disclosure.


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