Kinds of Business Finance

Business finance is available in three forms depending on the period.

1. Short term finance
2. Long term finance
3. Intermediate credit

SHORT TERM FINANCE
     Short-term finance is usually in the form of loans and must be repaid with in a year.

USES    Such loans are required for the following purposes:

1. Payment of wages

2. Payment of interest, rent, etc..

3. Clearing accounts payables (A/P)

4. Prepaid Insurance

5. Financing purchases of assets

6. Paying off current liabilities

7. Meeting petty and day-to-day expenses.

SOURCES     For business organizations  are available many sources to borrow funds.

1. Trade accounts (A/P)

2. Installment purchases (Hire purchase)

3. Commercial draft (Bill of exchange)

4. Accommodation bill

5. Pledging accounts receivable / Factors

6. Commercial paper (Promissory note)

7. Overdraft

8. Agricultural banks

9. Call loans

10. I.O.U. (I owe you)

11. Two-name paper advance

 1. TRADE ACCOUNT (A/P)

It refers to buying on account as a result of which accounts payable are created which are to be paid in a short span of time which may range from a few days to a few month depending on the practice in a particular types of business or product. The accounts payable is the current liability and shown in the balance sheet of the debtor firm. The trade credit results form the purchase of merchandise on account. The supplier may have credit terms as 2/10, n/30 or 2/10, n/60 etc. In other words, the seller offers the buyer to receive two percent discount if the latter pays within ten days and will have to pay net amount if he pays after ten days. However, the buyer will have to pay in thirty or sixty days as the maximum period as the terms of sales demand.
      Firm may purchase on account and pay after some time which may range from some days to some months. Those who purchase on account have to forgot cash discount, but they don't have to pay interest on it.

2. INSTALLMENT PURCHASES

Business firms may purchase machinery on installments which means the purchaser pays only a part as down payment at the time of purchase, and the rest of the amount is paid into equal months installments which are generally twelve. The buyer has to pay an interest.

3. COMMERCIAL DRAFT (Bills of Exchange)

A commercial draft or B/E is a credit instrument, which is in writing, unconditional and contains an order to the debtor to pay a certain sum of money in three months. This facility is usually enjoyed by businessmen and foreign traders. It is payable in three or six months.