Introducing finance is one of the most important factors to start a business. Finance meets the needs and objectives of the business firm for its expansion it is needed by a business concern not only for the expansion and growth but also for the survival of the business itself. Finance is the master key which provides access to all other resources. By contributing to the growth and development of a large number of industrial undertakings, finance helps the society to have a large variety of goods which they need. All managerial functions like planning, directing, control and co-ordination can be discharged effectively only if a business concern possesses adequate finance.
Depending on the nature of business, business finance is classified into three type’s namely short-term finance, medium-term finance and long-term finance.
Short-term finance: It is called short-term finance, as it requires for a short period of one year or less. It is a finance required for general expenses like purchase of raw-materials, payment of wages and salaries and for meeting the other day to day manufacturing, marketing and other expenses of the firm. It is quickly available and it is of greater use to small undertakings. Short-term finance from banks is usually in the form of loans, overdrafts, cash, credits and discounting bills of exchange. It also helps the firms to maintain good relationships.
Medium-term finance: It refers to finance required for a period of one year to five years. It is a finance required for permanent or regular working capital, replacement of worn-out machines, heavy repairs on buildings and on special advertisements. It is for meeting long-term needs hence it cannot be quickly arranged. Medium-term finance is usually raised through the medium-term public deposits, term loans from banks and financial institutions, through issue of redeemable debentures and redeemable preference shares for a medium term of 3 to 5 years. It is relatively cheap and of much importance to small business undertakings.
Long- term finance: long term finance refers to finance required for a period exceeding five years, usually for a period of five to twenty years. It is required for financing the fixed capital; say for procurement of fixed assets required for the establishment of a new undertaking and for the major expansion and modernization of an existing undertaking. It is usually raised through the issue of shares and debentures through term loans from financial institutions. It is needed for the acquisition of intangible assets such as goodwill, patents, trade mark, copy rights etc. It is costlier than the other two finances and is generally raised against securities. It is used for setting up the organization.
Hence business finance is essential to increase the profit margin of every individual who is into business. The most important factor about introducing finance is that it should be organized in a systematic manner. Just as circulation of blood is necessary in a human body to live, initiating finance into business is very essential for the smooth running of the business. business finance is the key to many successful business.
Tags: business finance, capital, Long- term finance, Medium-term finance, Short-term finance