Sources of Finance both Long Term and Short Term - Coursework Example

Surname: Tutor Task Institution Date Sources of finance both long term and short term Introduction Sources of capital or finance to fund any business is the hardest thing in the execution of any corporate business and also to any start up business, it is therefore very important for any individual to find any means that could fund the business in order to achieve it financial goals either in the present or in the future. Some of the most frequently used long term means in which many organizations use to fund business include capital market (Kieso and Weygandt,15-71).Capital market as defined is an arrangement in which the transactions which include the procurement and supply of the known as long term funds is carried out among individuals and organizations in the business (Virginia Clark,201-300). In order to rise the long funds using the capital market the companies raise the funds using issuing of the share and debentures of different types. The transaction of issuing the shares and debentures these transactions are said to take place in the market and new capital is raised either for the starting up companies or existing ones. But this particular business of selling and buying of shares takes place in another market which is called the stock market (Hudson,1-80). The individual or organizations which contribute to the share capital of any company trying to raise funds by issuing shares and debentures to the market become the shareholders of the company. This critical group can also be known as the members of the company (Hudson,1-80). Before a decision is made to for the company to issue the shares the leadership of the company has to reach on an agreement concerning the following issues including the amount of capital to be raised, the type of shares that the company is going to issue and finally the time that the company is going to issue the shares. The government control the way in which shares are issued by the companies (Kieso and Weygandt,15-71). Special financial institutions have that have been set up either by the government or by the non governmental organizations help in rising long term finances for the companies or the industrial enterprises, these particular organization provide great assistance to the staring up companies and also the existing once to raise the needed finances in order to advance the goals of the company (Hudson,1-80). In Japan for example; there are institutions such as industrial finance institutions of India, at a nation level there are state corporations that give loans to the developing companied to advance their vision (Hudson,1-80). These particular state corporations and the national institutions are also known as development banks, apart from the development banks that are highly reliable there are the investment companies also known as investment trusts. These particular institutions subscribe to the valued shares and debentures that are offered by the companies that needs the capital (Beaney; Lasher,250-400). Leasing of companies is also another way in which companies in need of the finance get the help that they need. Most of the manufacturing companies can manage to confidently secure long term funds by leasing other companies, to concur with this reason then the two campanile should come up with an agreement that allows the leasing company to purchase and own the plant, machinery, and the fixed assets that the company that is being leased owns for a period of time in which the company pays (Kieso and Weygandt,15-71). At the end of the period in which the company is allowed to use the property the company too can have an option of purchasing the properties at a lower price. The lease rent always includes interest that is beside the expenses and profits of the leasing company (Beaney; Lasher,250-400). Funds for developing any company can also be raised using the foreign sources; these foreign sources usually include the famous foreign collaborations. These particular collaborations have to be approved by the government (Virginia Clark,201-300). Companies can secure good funds from abroad through the subscription of the foreign collaborations to help in their share capital or the more advanced way of technical knowledge, design drawing of the company structures and also the machinery, without leaving aside the patents (Beaney; Lasher,250-400). The international financial institutions which include the World Bank and the international finance corporations which in high levels they provide good and long term fund that are used for development all over the world, the world bank is known to help governments of the member countries with finances which help them fund their businesses(Kieso and Weygandt,15-71). The World Bank also fund individual enterprises which help a lot in raising the capital in order to drive their businesses towards their desired dreams (Hudson,1-80). The international finance corporation was put in place mainly to give assistance to the private businesses without the guarantee of the member states of the World Bank the corporations provided them also with risk capitals. Individuals too can get funds from other individuals who are rich and may live outside the country this way the companies in the motherland can develop with funds from individuals who can either be relatives or stranger with will to help(Beaney; Lasher,250-400). Companies can also be able to raise the required funds through the retained profits and the reinstatements of the acquired profits. Profits gained by the company are a very important source of long term funds for the existing companies. As for the ongoing companies the amount of profit that is accumulated from time to time or from one year to another are used as funds(Beaney; Lasher,250-400). When the company has developed to an extend at which the shares of the company are not distributed or shared among the shareholders of the company, the profits that are retained then can be reinvested back to the company as capital as long term funds either for the expansion or for the diversification the company. The retained profit is for of internal fund for the company therefore the funds do not incur any cost of floatation which is always incurred when raising the funds from an external source (Kieso and Weygandt,15-71). The companies can also be able to raise the short term funds through such methods as trade credits, trade credits are got by the companies from its supplies, trade credits does not make the fund to be available in cash but this can help in facilitating the procurement of the supplies required by the company without an immediate payment. There is no interest that is paid on the trade credits (Kieso and Weygandt,15-71). The period at which the trade credit takes place depends mainly on the nature of the product in question, other factors include the place in which the customer is, the level of competition faced by the product in the market, the resources of the supplier in terms of finances and finally the rate at which the supplier is eager to sell his/her stock (Beaney; Lasher,250-400). Installment credit is another way in which companies can get funds for a short period of time. Most firms can always access credit from the suppliers of equipments; the supplier with an agreement with the company that is trying to get funds can procure equipment for the use in the running of the company for a period of up to 12 months and even more. The companies can get into an agreement to pay the equipments in installments with a deposit of some amount; the supplier of the product can charge some interest on the payment which is paid included in the installments. The ownership of the product purchased by the company on higher purchase remains with the supplies until all the installments have been settled (Kieso and Weygandt,15-71). The companies that purchases the concerns of the company in need of the fund can always make advances of up to 60 percent of the amounts the accounts receivable that was pledged, the company that debt the business concerns the payments that which in return they are forwarded to the finance company(Beaney; Lasher, 250-400).Some of the companies can insist in that the customer makes a part of the payment toward some of the products in advance this comes particularly in the case of special order or those known as big orders. The payment that is mad in advance by the customer is treated as part of the payments of the products that have been ordered by the customer and these products will be delivered on a latter date (Beaney; Lasher, 250-400). Banks such as commercial banks plays a very important role in trying to always meet the short term financial needs that most of the individual businesses need. Commercial banks provide solutions to the problem using many different methods which include giving of loans, cash credits, overdraft, and discount on bills this way banks are very important source of short tern funds for many companies (Kieso and Weygandt,15-71). Conclusion For any company that is going concern to succeed in expanding and diversifying its business then it has to seek solutions of getting funds when they are required to be used, some of the most practical and important ways have been stated above, but as it is known there are always many ideas that can be born every day and a bright leadership can always come up with the best alternative, the leadership of the company needs to always assess the conditions at which the company is before they can settle on a solution of getting the funds Work cited Beaney, Shaun. "Defining corporate finance in the UK". Washington DC: Corporate Finance Faculty, ICAEW,, 2005:250-400. Damodaran, Aswath. Strategic Risk Taking: A Framework for Risk Management. New York: Wharton School Publishing, 2007:25-47. Hudson, G. Lane and J. Symanowitz. "A Practical Application of an Economic Optimisation Model in an Underground Mining Environmen. New York: New York Times, 2004:1-80 Kieso, Donald E. and Jerry J. & Warfield, Terry D. Weygandt. Intermediate Accounting . New York: John Wiley & Sons., 2007: 15-71. Lasher, William. Practical Financial Management. New York: South-Western College Publishers, 2010. Virginia Clark, Margaret Reed, Jens Stephan. "Using Monte Carlo simulation for a capital budgeting project,." Management Accounting Quarterly (2010): 201-300. Read More