This article is about Sources of Business Finance. Running a successful business demands much more than just coming with an innovative business idea and planning to implement it. There are two key reasons why companies fail; insufficient business finance and its poor management. So, as a business owner you must realize that the major challenge associated with running a company is to take care of business funding. Here is a list of some long term as well as short term financial sources which are necessary for business at different point of times.
- Equity Shares: This is one of the widely used methods by companies who are financially strong. Investors subscribe to equity shares of the company which ultimately creates strong capital base for the company. Share holders share profit and loss in the company only in proportion to their holding percentage.
- Bank Overdraft: It is commonly used source of finance which is helpful for any type of business from manufacturing, pharmaceutical, banking to IT. In bank overdraft option, company can withdraw any amount of money over his defined account balance. This alternative is perfect for businesses who want to meet their short term capital needs.
- Commercial Loans: Commercial loans are one of the strong sources of long term finance for businesses. They offer credit for specific time period against right kind of security or mortgage. The greatest advantage with the commercial loan is that companies can re-negotiate the terms and conditions according to their needs at any point of time.
- Trade Credit: It is standard practice followed by companies to purchase raw materials and machinery on credit. This kind of transaction results in higher entries of accounts payable which needs to be repaid after stipulated period of time. In trade credit, goods are purchased without any cash and payment can be made in 30, 60 or 90 days. Trade credit allows very high freedom and flexibility to companies in meeting their short term financial difficulties.
- Retained Earnings: Retained earnings are kind of reserves generated from surplus profits which can be utilized to finance business project in emergencies. The key advantage with this source of business finance is that companies don’t need to bear any interest on the fund raised.
Apart from the sources mentioned above, there are several finance options which companies utilize on the basis of their requirement. But selection of a particular source of finance is entirely based upon the cost attached to it and its feasibility to company.