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Define Finance & Various Source of Business

Finance & Various Source of Business

 

Definition

That business activity which is concerned with the acquisition and conservation of capital funds in meeting the financial needs and overall objectives of the business.

By kriz and duggen

Business finance concerns a firm’s acquisition of funds and the management of these funds for various operations.

Source of business finance

1. Equity finance

The financing made by the person who plans the business and makes permanent investment in the form of land, building, machinery etc. is called equity finance

Source of equity finance

1. Sole proprietorship

The only source of equity financing in sole proprietorship is the amount, which an e trepreneur invest in the business in money terms or otherwise i.e. land, building, machinery, etc,

2. Partnership

Partner’s contribution to capital fund is the source of equity financing in partnership. They may contribute money or money’s worth to business.

3. Joint stock company

The shareholders are the source of equity financing for a company. They contribute to the capital fund of the company by purchasing shares. It is a permanent source of capital fund and can be increased by further issue of shares.

2. Debt financing

The financing made in a business by the person other than the owner is called debt finance. We discuss the source of debt financing with reference to the financial needs of a business,

Which may be short term, intermediate or long term?

 

1. Short term financing

 

The financing made by the creditors or periods of one year or less is called short-term financing.

 

Sources of short term financing

 

1. Trade creditors

The manufactures, wholesalers and other suppliers of goods who give the facility of credit purchase to their customers are called trade creditors. This is not a cash loan but it is a loan in the form of goods and an important source of short term financing

2. Commercial bank

Commercial bank provide short term finance to a business

enterprise in the form of over draft, discounting bills f exchange, loans against security

 

3. Finance companies

The finance companies are providing the service of short term financing. These institutions are not common and know to people but have contribution in promoti g small business. For example small business finance corporation SME bank, Khshhali bank etc.

4. Customers

Sometimes a company receives a part of total payment from the customers by way of advance. It is also a sort of short term finance

5. Pledging the accounts Receivable

Some business enterprises obtain loan by pledging their accounts receivable with bank. This is the least used method in Pakistan.

 

Intermediate financing

 

 

To finance a business for a period of more than a year but less than 5 years is called intermediate financing

 

Sources of intermediate financing

 

1. Commercial banks

Commercial banks provide intermediate term finance to traders and manufactures against security.

2. Insurance companies

Insurance companies provide finance to manufactures against the security of assets.

 

3. Industrial development bank

Industrial development bank of Pakistan was particularly established in 1961 to provide intermediate and long term financing to establish and expand industries

4. Small business finance corporation

The corporation is playing a significant role in providing loans to establish small and medium size businesses and industrial units. Youth investment promotion society is also working under this corporation to provide loans to the unemployed educated youth.

5. Pakistan industrial credit and investment c rp ration

This corporation was set up in 1957 and is major source of debt financing for medium and long term projects It also provides loans for working capital

6. Hire purchase

The manufactures can avail the facility of hire purchase where they scheme generally charges more price for the goods supplies by him and transfer the right of ownership after receiving the final installment.

 

Long term financing

 

In order to have a good capital structure and al well planned business long term financing is required. The period is generally more than 5 years.

 

 

Sources of long term financing

 

1. For non company business

1. O ner’s capital and the profit retained in the business
2. Loan from friends, relatives employees at fixed rate of interest. When one has to purchase his competitor’s business or to set up new branches of office or to sign a favorable contract.
3. Admission of a new partner in partnership business
4. Commercial banks and other financial institutions like IDBP, PICIC, etc

 

2. For company business

Sale of shares

1. Issue of debenture certificates
2. Commercial banks
3. IDBP-industrial development bank of Pakistan
4. PICIC- Pakistan industrial credit and investment corporation

 

6. ICP- investment corporation of Pakistan
7. NIT – national investment trust
8. EPE- equity participation fund

 

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