Sources of Business Finance

Sources of business finance can be studied under the following heads:

(1) Short Term Finance:

Short-term finance is needed to fulfill the current needs of business. The current needs may include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and purchase payments are not perfectly same at all the time. Sometimes sales can be low as compared to purchases. Further sales may be on credit while purchases are on cash. So short term finance is needed to match these disequilibrium.

Sources of short term finance are as follows:

(i) Bank Overdraft: Bank overdraft is very widely used source of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet short term unexpected expenses.

(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill which can be used to finance immediate needs.

(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However, these are also used as source of financing the operations necessary to execute the job order.

(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are used as a source of financing small expenses which are to be paid immediately.

(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take loan from banks and that loan amount can be used as finance for a short time period.

(vi) Financial Institutions: Different financial institutions also help businessmen to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short term financial assistance for businessmen.

(vii) Trade Credit: It is the usual practice of the businessmen to buy raw material, store and spares on credit. Such transactions result in increasing accounts payable of the business which are to be paid after a certain time period. Goods are sold on cash and payment is made after 30, 60, or 90 days. This allows some freedom to businessmen in meeting financial difficulties.

(2) Medium Term Finance:

This finance is required to meet the medium term (1-5 years) requirements of the business. Such finances are basically required for the balancing, modernization and replacement of machinery and plant. These are also needed for re-engineering of the organization. They aid the management in completing medium term capital projects within planned time. Following are the sources of medium term finance:

(i) Commercial Banks: Commercial banks are the major source of medium term finance. They provide loans for different time-period against appropriate securities. At the termination of terms the loan can be re-negotiated, if required.

(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to have the required goods with payments to be made in future in agreed installment. Needless to say that some interest is always charged on outstanding amount.

(iii) Financial Institutions: Several financial institutions such as SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on different matters.

(iv) Debentures and TFCs: Debentures and TFCs (Terms Finance Certificates) are also used as a source of medium term finances. Debentures is an acknowledgement of loan from the company. It can be of any duration as agreed among the parties. The debenture holder enjoys return at a fixed rate of interest. Under Islamic mode of financing debentures has been replaced by TFCs.

(v) Insurance Companies: Insurance companies have a large pool of funds contributed by their policy holders. Insurance companies grant loans and make investments out of this pool. Such loans are the source of medium term financing for various businesses.

(3) Long Term Finance:

Long term finances are those that are required on permanent basis or for more than five years tenure. They are basically desired to meet structural changes in business or for heavy modernization expenses. These are also needed to initiate a new business plan or for a long term developmental projects. Following are its sources:

(i) Equity Shares: This method is most widely used all over the world to raise long term finance. Equity shares are subscribed by public to generate the capital base of a large scale business. The equity share holders shares the profit and loss of the business. This method is safe and secured, in a sense that amount once received is only paid back at the time of wounding up of the company.

(ii) Retained Earnings: Retained earnings are the reserves which are generated from the excess profits. In times of need they can be used to finance the business project. This is also called ploughing back of profits.

(iii) Leasing: Leasing is also a source of long term finance. With the help of leasing, new equipment can be acquired without any heavy outflow of cash.

(iv) Financial Institutions: Different financial institutions such as former PICIC also provide long term loans to business houses.

(v) Debentures: Debentures and Participation Term Certificates are also used as a source of long term financing.


These are various sources of finance. In fact there is no hard and fast rule to differentiate among short and medium term sources or medium and long term sources. A source for example commercial bank can provide both a short term or a long term loan according to the needs of client. However, all these sources are frequently used in the modern business world for raising finances.

How to Get Business Financing in a Tough Credit Market

The credit markets have been tightening for the last year and personal credit has become more and more elusive. Now, more than ever, we are starting to see a tightening on business credit and loans offered by banks. Banks are tightening their standards and dropping more liberal business loan programs as well.

Just a few months ago, BofA offered an express business line of credit program that even entrepreneurs in business just a month or two could qualify for with the right credit scores. They pulled the program in the last quarter. American Express for years has offered a Business Line of Credit program that entrepreneurs could apply for in addition to their American Express credit cards. The line of credit was competitive in the industry with interest rates and most small business owners with an American Express credit card were getting approved. The program was pulled in the last quarter.

The closing of great programs such as the BofA Express Line of Credit and Amex Business Line of Credit are signaling the need for small business owners to find alternative ways to finance their businesses. There are several unconventional methods that most entrepreneurs can use to build up access to capital they will need from time to time. Some of these methods include: merchant account cash advance programs, equipment leasing, equipment sale-lease back, A/R Factoring and trade credit (also known as corporate credit or business credit).

Trade credit is the single largest source of lending in the entire world. It is when one business sells services or products to another business on credit terms. For example, when Dell Computers sells a laptop to a small business owner, the business owner is given a choice: pay now with a Mastercard/Visa/Amex credit card, apply for a Dell Computer line of credit or apply for a Dell Computer Credit Card. When the small business owner chooses to apply for a Dell Credit Line or Credit Card they are using trade credit. Dell will then offer terms to the applicants who qualify. Terms may include no-interest for 30 days if paid in full, or an interest rate charged each month a balance is carried and a small monthly payment that must be made on the credit card.

If the business owner has structured their company properly before applying for the credit, they will likely receive an approval based solely on the business credit profile, business credit score and how compliant the company is with the business credit market. If the business is prepared and built some initial business credit before applying with Dell, they will likely get approved regardless of what the personal credit score of the owner looks like. This is True trade credit (corporate credit), when you rely completely on the business’ ability to obtain the credit and not just that of the individual owner or officer of the company. Every entrepreneur should have a business credit profile and score. That includes also being in compliant with the lending market.

A business credit profile and score need to be created with all the major business credit bureaus, not just one. D&B (Dun and Bradstreet) is the oldest business credit bureau, although Experian Business and Equifax Business have created very competitive products and services to compete directly with D&B over the last few years. Most credit bureaus create a business credit profile and score when companies report to the bureaus the payment history of their clients. The more companies reporting to a business credit profile, the better. Companies who purchase a business credit report for analysis to determine credit approvals, like to see when others have granted credit already. They would prefer to see several credit accounts with the business, whereas with an individual you may find it more difficult to obtain credit when you have a lot of credit accounts.

Most small business owners seeking financing are looking for the money to purchase a product or service. The majority of time the product or service can be found through a company offering credit terms. Trade credit is used by household supply stores, marketing companies, printers, graphic designers, internet marketing companies, gas stations, equipment companies, auto-dealers, shipping companies, office supply companies, furniture companies and many more.

In addition to trade credit as an alternative financing option there is merchant account cash advance programs. Although this type of financing can be expensive it is still a great option for some businesses. This type of financing is for businesses with a merchant account charging more than $10,000 per month on the account. Many merchant cash advance companies will advance up to three months charges on a merchant account with very little personal credit information required to obtain the loan. The loan is then paid back out of future merchant account activity as a percentage of the total amount charged that month.

Another alternative source of financing is A/R Factoring. If a company has accounts receivable with other businesses with decent history and credit scores, a factoring company will come in and buy the receivables for a discount on the future value. The business gets money now and the factoring company waits for the invoices to be paid. When they are paid by the customers of the business, the factoring company gets their share and repayment on the advance.

A company can also use leasing as an option to finance their business. A lot of equipment and even software can be leased. There is extremely beneficial to start-up companies and those looking for large equipment purchases. The company doesn’t have to pay up front for a large ticket item, which than conserves cash for the growth and day to day operations of the company.

Startup Business Financing

Before you start to obtain startup business financing, it is very important that you determine the approximate amount that you will require. The current assets minus current liabilities will be the working capital of the business. Most of the time, you can see such information in the balance sheet and through this you will be able to know how much money will be required to carry out your business on a short-term basis.

Having found out the amount of startup business financing required, you will have to think of a way in which you can get a loan for your business.

o Start-up Financing is available to entrepreneurs whose business is based on a solid business model with a credit worthy structure.
o Banks award business loans to those that have a well spelled out plan which showcases your partners, your track record, your strategies and advantages.

Banks are conservative where investments are concerned. The chances of getting a loan will be more for an existing business in comparison to a new one.

o No bank wants to lose money by taking risks. If your business proposes to be a risk, you’ll have to work harder to get your small business loans approved

On the other hand, you will be able to acquire a startup business financing loan if you make a good loan request and have a good plan for your business. Help can be obtained from the SBA as well as the Small Business Development Centers can be obtained easily, as they are situated in most major cities in the United States. Your business plan must consist of your personal bank statements, sales and cash projection. If you are taking the help of the SBA then you will need to state how you will reimburse the startup business financing loan and you will also be required to guarantee the same. The bank might want to see your personal investment in the business apart from the time that you give to the business.

o Banks would want to know your business’s financial prospects. They want to gauge its worth and how much money you’re moving.
o Alternative sources, (excluding banks) may want you to “pay” more for your start up business loan.
o You may have to pay higher interest rates. You might also need to offer some equity in your business to receive funding

Ways in which you can get loans faster and easily

Financial assistance sometimes comes from institutions in the form of credit or loan. This loan can be obtained at a relatively short period of time and there are financial resources that will help you get the loan. Few of such startup business financing resources are:

– Credit cards: You can get a credit ceiling of twenty thousand dollars (for your small business) from big credit card companies if you have a good credit record.
– Unsecured business loans: Try such a loan if you do not want to guarantee the loan personally or if you do not have a credit record.
– Equipment leasing/financing: Many companies are willing to lend you the money taking equipment as collateral for your loan.
– Asset based loan: is ideal for using equipment to acquire loan, account receivable or leveraging your stock.

o Those having a mortgage with a bank, find it easier to obtain small business loans.
o Check newspapers for financing offers. Such institutes grant small business loans and processing might be easier with them.
o Availing a start up business loan has become easier, thanks to a growth in competition among lenders.
o Plenty of channels are available for raising capital. Most of the above avenues have abundant variations. Build up a solid business plan, along with a financial adviser, and just start asking.