Sources of Business Finance

1 February, 2013

In running a business, there are different types of finances that are needed. Basically this can be categorized into three types: short-term, medium-term, and long-term. Learn about these three types of finances and their sources from this article.

Short-Term Finance

One important thing that is required when running a business is short-term finance. Short-term finance help fulfill certain business needs such as salaries, operating fees, taxes and other things, particularly for start up businesses which don’t have the profit yet. These short-term finances are very important as sales are not always consistent. There are times when the sales are significantly low and there are times, when they rise above the average. This is what makes short-term finance all the more important. Below is a list of some major sources where businesses could get their short term finance.

  • Advances coming from customers: There are a lot of times when customers would make an advanced payment to confirm their orders. Since they are paid in advance, this money could be used for operating purposes in the mean time.
  • Purchases made by installment: Paying by installments is a great source of short-term finance. Additionally, businesses mostly earn more by payments made by installments, since these types of payments mostly have a small interest paid per month.
  • Loans from financial institutions: There are a lot of loaning institutions that can provide businesses with good start up business loans and other small business loans in Australia.

Medium-Term Finance

Medium-term finance is those that are planned for a span of 1-5 years. Medium-term finances are often used for replacing of certain facilities, after a long time of use. They are also required for modernizing the office space and so on. Updating business operations and are also one use of medium-term finances.

Below are some sources of medium-term finance:

  • Loans provided by commercial banks- Banks are a great source for medium-term finances. Some loans in the banks could be quite flexible and can be very helpful for businesses.
  • Making purchases on installments- This is also known as hire purchases. With this, businesses can get its supplies needed while having the payment given by installment on an agreed upon schedule.
  • Loans through insurance companies- Insurance companies can provide a large amount of funds for businesses. These loans are mainly used for medium term financing.

 Long-Term Finances

The long-term finances are those which are needed on a more permanent foundation or for finances that are planned for over five years. These are needed for certain building changes or heavy operation plans. If there are new business plans, long-term finances is what is needed. Some sources of these finances are listed below.

  • Leasing- Leasing generates long-term finance, without taking out too much from the business’s cash flow.
  • Getting from retained earnings- The retained earnings are reserved savings from extra profits. The retained earnings are mostly used for long-term finances.
  • Use of equity shares- A lot of businesses around the world make wide use of equity shares, to generate long-term finance. This is a safe method to raise funds for a business’s long-term plans.

In the modern world of business, the different types of finances are very much widely used. At times, they can be mistaken since some sources for long-term finance can also be sources for short-term finance. Overall, businesses should know about these things to better adjust their budgets and keep a steady cash flow.

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