Introduction
Finance of a business means that the business raises funds to run its activities. It is an essential part of running a business because without business finance, the business will not be able to develop, grow and even start. In addition, business finance keeps cash flowing. Businesses usually raise funds from the shareholders, long-term and short-term sources. There are risks on every decisions that investors make to finance a business as no one knows how will it goes in the future. Factors like natural disaster, economic crises and changes in demand of markets might destroy the business. Therefore, sometimes it is difficult for businesses to raise funds if investors do not want to take the risk.
Short-term financing and long-term financing
Short-term financing and long-term financing are divided into internal and external sources of finance. Internal sources of finance are sources that come from its own business. External sources of financing are sources that come from the outside of the business. Internal and external sources of financing a business can also be divided into short-term and long-term financing.
Short-term financing means raising funds that need to be paid back within a year in order to operate daily business, including buying inventories, daily supplies and paying employees’ salaries.
Long-term financing involves purchasing new equipment, expanding the business, improving research and development, and also reinforce cash flow system. Businesses are allowed to pay back in a much longer period of time, for instance, 10 years.
It clearly shows that the most obvious differences between short-term and long-term financing are the duration of the finance and their purposes. However, these are not the onl...
... middle of paper ...
...m [11 March 2014]
Pizzey, 2001, Accounting and Finance, fifth edition, Continuum London and New York
Pour, 2011, Identifying Different Sources of Finance To Plc Advantages and Limitations, available from http://www.academia.edu/466098/IDENTIFYING_DIFFERENT_SOURCES_OF_FINANCE_TO_PLC_ADVANTAGES_AND_LIMITATIONS [12 March 2014]
Riley, 2012, Financing using an overdraft, available from http://www.tutor2u.net/business/finance/finance_overdraft.htm [10 March 2014]
Riley, 2012, Sources of finance – retained profit, available from http://tutor2u.net/business/finance/retained_profit.html [11 March 2014]
Thomas, 1999, An Introduction to Financial Accounting, third edition, McGraw-Hill Book Company Europe
Yakhshibaev, 2011, Sources of Short-term Finance and Investment Opportunities, available from http://economics.journals.cz/documents/Vol2/Untitled18.pdf [10 March 2014]
Also, the usage of high yield bonds securities for financing became popular during the 1990s in foreign markets such as Latin America, Asia, and Europe showing the rise in international appeal for these kinds of securities. However, outside of the U.S the high yield market has taken a longer time to become popular and thus there is still room for the development of high yield bonds within financial markets in emerging countries. It is safe to determine that the market for high-yield bonds will always be in existence since it is a viable alternative for many fast growing firms to acquire financing and is a rewarding option for investors. The key to the still growing, strong market demand for high yield bonds is based on linking the [U.S.] economy’s constant desire for capital with investors’ desire for higher returns on their investment.
MYERS, S.C. and MAJLUF, N.S., 1984. Corporate financing and investment decisions when firms have information that investors do not have. Journal of Financial Economics, 13(2), pp. 187-221.
2 (1970): 383–417. i.e. a. Fama, Eugene F. “Efficient Capital Markets II.” Journal of Finance 46, no. 1 (September, 2011). 5 (1991): 1575–1617.
William Sharpe, Gordon J. Alexander, Jeffrey W Bailey. Investments. Prentice Hall; 6 edition, October 20, 1998
Berk, J., & DeMarzo, P. (2011). Corporate finance: The core, second edition. (2nd ed.). Boston, MA: Prentice Hall.
Ritter, Lawrence R., Silber, William L., Udell, Gregory F. 2000, Money, banking, and Financial Markets, 10th edn, USA.
decided to start up a shop would need finance at first to just buy the
The cash flow from your business's operations ¡X the cycle of cash flow, from the purchase of inventory through the collection of accounts receivable ¡X is the most important factor for obtaining short-term debt financing. A lender's primary concern is whether your daily operations will generate enough cash to repay the loan. In addition, cash flow shows how your major cash expenditures relate to your major cash sources. This information may give a lender insight into your business's market demand, management competence, business cycles, and any significant changes in the business over time.
One of the key areas of long-term decision-making that firms must tackle is that of investment - the need to commit funds by purchasing land, buildings, machinery, etc., in anticipation of being able to earn an income greater than the funds committed. In order to handle these decisions, firms have to make an assessment of the size of the outflows and inflows of funds, the lifespan of the investment, the degree of risk attached and the cost of obtaining funds.
Shareholders are people who have a share in the business, they have invested money into the business so if the business does not do well the shareholders lose out. Therefore, it is vital for the business to increase the profit.
Research on the Sources of Finance for a Business Firms sometimes need to raise finance for Working Capital and Capital Expenditure. Explain what each is and give examples. · Working Capital (or Revenue Expenditure) The working capital is made up of the current assets net of the current liabilities. It is vital to a business to have sufficient working capital to meet all its requirements. Many businesses have gone under, not because they were unprofitable, but because they suffered from shortages of working capital.
Financial Future: Where Will it be in 10 Years? Retrieved on November 20, 2013 from
Functions performed by financial intermediaries can be categorized into three functions; (1) maturity transformation, (2) risk transformation, and (3) convenience denomination. With maturity transformations, intermediaries convert short-term liabilities to long term assets. This conversion is common with banks and other institutions that provide liquidity for entrepreneurs, giving a short term debt a match with a long term loan. Rather than constantly evaluating short term loan options and rolling over the debt balance, a longer term commitment is able to be made that locks in a lower rate to benefit all parties. Additionally, intermediaries can provide risk transformation, which offer the ability to convert risky investments into relatively risk-free by lending to multiple borrowers to spread the risk. By pooling the funds of multiple investors, the intermediary – such as a mutual fund – inherently provides diversification and tolerance against a single investment producing undesirable results. Finally, convenience denomination is provided by an intermediary. With a large quantity of deposits being held at a financial intermediary, they are able to match small deposits with large loans, and larger deposit...
Access to capital and credit at various stages in the business life cycle is identified as the major hurdle by the entrepreneurs. For many small firms and most start-ups, the personal funds of the business owners and entrepreneur and those of relatives and acquaintances constitute as the major source of capital. For many small businesses, especially during the early years of their operation, credit is simply not available. For many others, the limited available credit is not through bank loans. Due to this many of them rely on multiple credit card balances and home equity loans as major sources of credit for start-up firm. Because banks are bound by laws and regulations to prudent lending standards that require them a risk management assessment for each loan made. These regulations were made more vigor during the late 1980'' and early 1990 . Banks always found that lending to manufacturing firm with hard asset such as property, equipment, and inventory has always been easier than lending to today's expanding service sector firms. Because the service sector firms own few hard asses, therefor lending judgment have to be based in terms of character, markets, and cashflow, which make it difficult to the bank to meet the regulations for the approval of the loan. Additional, the banking industry, as well as the entire financial sector of the
Block, S. B., & Hirt, G. A. (2005). Foundations of financial management. (11th ed.). New York: McGraw-Hill.