Sources of long and short term finance

Sources of finance can be broadly categorized into long-term and short-term sources. Here’s an overview of each:

Long-Term Sources of Finance:

1. Equity Shares: Issuing shares to investors in exchange for ownership in the company.
2. Preference Shares: Shares that pay a fixed dividend but do not usually confer voting rights.
3. Debentures/Bonds: Long-term debt instruments issued to raise capital, usually with a fixed interest rate.
4. Retained Earnings: Profits reinvested back into the business rather than distributed to shareholders.
5. Venture Capital: Investment from specialized funds or investors in exchange for equity, typically for high-growth startups.
6. Private Equity: Investment made by private equity firms into companies in exchange for equity ownership.
7. Bank Loans (Term Loans): Loans taken from banks or financial institutions that are repaid over a long period with interest.
8. Lease Financing: Acquiring assets on lease rather than purchasing them outright.

Short-Term Sources of Finance:

1. Bank Overdraft: A facility provided by banks that allows a business to withdraw more than its account balance, up to a certain limit.
2. Trade Credit: Suppliers allowing goods or services to be purchased on credit, with payment due at a later date.
3. Commercial Paper: Short-term unsecured promissory notes issued by large corporations.
4. Invoice Discounting/Factoring: Selling invoices to a third party at a discount to obtain immediate cash.
5. Short-term Loans: Loans obtained from banks or financial institutions for a short duration.
6. Accruals: Accumulated expenses that are paid at a later date, such as wages and taxes.

These sources vary in terms of cost, risk, duration, and terms of repayment, and businesses often use a mix of both long-term and short-term finance to meet their capital needs effectively.