The paper "Sources of Funds and Capital Structure" is an outstanding example of finance and accounting coursework. Businesses will always be in need of money to finance both the long-term and short-term needs of the business. Sources of funds may be internal or external, internal sources are the “ safest and most preferred but may be inadequate such that external funding may be required” (Dlabay and Burrow 92). Below are examples of short term and long term financing under respective headings. Short term financing Short term financing is a kind of financing whereby the business has to repay or return the money within one year.
Of course, there are several factors that influence the choice of funding for a business such as a cost, the implication on capital structure and the repayment period. A business may choose to finance using debt sources or equity. McLaney contends that debt financing is costly but businesses have to use it at some point since capital might not always be sufficient for the business 45. Sources of short term funding for business include but not limited to the following sources: Debt Bank overdraft This type of funding facility is extended to a business which does not have money enough in its accounts or in cash to finance a short term need.
It is usually a relatively small amount depending on the needs of the business and its credit rating. The fund is expected to be repaid back to the bank within a stipulated short time of mainly 30 days. The interest on the money starts accumulating immediately the account has been overdrawn. Many businesses, especially in the small and medium-sized segment, rely on this funding to take care of huge orders or pay their expenses when profitability in a month falls below expected levels (McLaney 56). Short term loans Businesses can also take up short term loans from the banks to finance short term projects within their financial year.
The loan is different from an overdraft in that it is usually backed with some more collateral and lasts for an average of one year. Banks can extend this time depending on the repayment ability of the business although the common limit is three years.
Short term loans will mostly be secured by collateral in the form of asset in case of defaulting on the loan by the business (McLaney 60). Short term Leasing A business can buy an asset or land for production purposes. The business can also lease the land or equipment from a leasing firm or another business. The difference between the two is that, in the latter, you don’ t own the asset but can use it for your production purposes after you have hired it. In the former, you buy the asset and use it as your own.
Buying an expensive asset can be a costly affair to a business which is cash-constrained, leasing, therefore, becomes a preferred option to acquire the equipment and keep sufficient workflow capital to run the business without reducing available funds (Redman, Tanner and Manakyan 172). Trade credit This is an arrangement whereby a business gets goods from a supplier to pay at a later date usually within one month or three months depending on the demand behaviors of the industry. This is a common method of doing business for businesses limited in terms of working capital.
Small and medium-sized businesses rely on good relationships between them and suppliers to ensure they get such benefits as this which are vital for their survival and growth. It is also common for big businesses to pay for huge orders and request for supply in small portions until the order is over (Dlabay and Burrow 74). This is another form of short term funding for businesses since they can use the money for short term needs but still have enough stock to sell to other customers.
Dlabay, R Les and L James Burrow. Business Finance. Cengage Learning, 2007.
McLaney, Eddie. Business Finance: Theory and Practice. Prentice Hall/Financial Times, 2009.
Redman, Arnold, John Tanner and Herman Manakyan. "Corporate real estate financing methods: A statistical study of corporations’ choices." ournal of Corporate Real Estate 4.2 (2002): 169-186.
Seitz, nEIL and Mitch Ellison. Capital Budgeting and Long-Term Financing Decisions. Thomson/South-Western, 2005.
Wang, Zhengwei and Wuxiang Zhu. "Equity Financing Constraints and Corporate Capital Structure: A Mode." China Finance Review International 3.4 (2013).