Source of long term and short term finance
- 1. Sources of long-term and short- term finance Name : Pallabi Paloi Course code : MIM501 Financial Management University Roll No : 31442723039 Registration No : 233141010039 Institution Name : Techno India College of Technology
- 2. What is Finance Definition : Finance, in its broadest sense, is the management of money and includes activities like saving, borrowing, investing, budgeting, and forecasting. It encompasses how individuals, businesses, and governments acquire and utilize funds to achieve their goals. Essentially, it's the science of how money works in the world. Why Businesses Need Finance: To start operations To expand and grow To meet day-to-day needs
- 3. Source of Finance Ownership Source of generation Period
- 4. Based on Period :
- 5. Sources of Long-Term Finance Long-term financing represents those borrowings or loans which are offered for a period greater than one year. It can be done by issuing equity shares, debt financing, long-term loans, bonds, or leases. Long-term finance is taken either for big projects, company expansion, or financing. Usually, long-term financing deals with huge amounts.
- 6. Sources of Long-Term Finance 1. Equity Capital : Meaning: Funds via IPO/private investors, ownership is shared. Pros: No repayment or interest, high return potential. Cons: Ownership dilution, high risk for investors. 2. Preference Shares : Meaning: Shares with fixed dividend & priority repayment. Pros: Steady income, lower risk than equity. Cons: No voting rights, costlier than debt. 3. Debentures : Meaning: Fixed-interest instruments for long-term borrowing. Pros: Stable income, liquid, inflation-protected. Cons: Mandatory interest, increases debt load.
- 7. Sources of Long-Term Finance 4. Term Loans : Meaning: Bank loans for 5–10 years to fund big projects or assets. Pros: Good for large investments, fixed repayment schedule. Cons: Interest cost, collateral required. 5. Retained Earnings : Meaning: Profits reinvested in the business instead of distribution. Pros: No cost, no debt, no ownership loss. Cons: Limited by profit availability, may reduce dividends.
- 8. Importance o Capital Expenditures: Funds for infrastructure, machinery, and expansion. o Business Growth: Supports new products, market entry, and acquisitions. o Liquidity & Stability: Reduces short-term debt and ensures steady cash flow. o Cost Efficiency: Lower interest rates and better debt management. o R&D Support: Enables innovation without repayment pressure.
- 9. Sources of Short-Term Finance Short term finance refers to financing needs for a small period normally less than a year. In businesses, it is also known as working capital financing. 1. Trade Credit Meaning: Credit from suppliers to buy goods now and pay later. Pros: No immediate cash needed, quick & easy to arrange. Cons: Limited amount, may affect supplier relationship if delayed. 2. Bank Overdraft Meaning: Facility to withdraw more money than account balance. Pros: Flexible, quick access to funds. Cons: High interest, repay on demand. 3. Cash Credit Meaning: Borrow from a bank against security (like inventory). Pros: Flexible withdrawal up to a limit, interest only on amount used. Cons: Requires collateral, limit fixed by bank.
- 10. Sources of Short-Term Finance 4. Short-Term Loans Meaning: Loans with repayment period under 1 year. Pros: Quick availability, useful for urgent needs. Cons: High interest rates, strict repayment timeline. 5. Commercial Paper Meaning: Unsecured promissory note issued by companies to raise funds. Pros: Low interest compared to bank loans, large amounts possible. Cons: Only for strong credit-rated companies, short maturity (90–270 days).
- 11. Comparison Basis Long-Term Finance Short-Term Finance Duration More than 3–5 years Less than 1 year Purpose For capital expenditure, expansion, large projects For working capital, daily operations Sources Equity shares, preference shares, debentures, term loans, retained earnings Trade credit, bank overdraft, cash credit, short-term loans, commercial paper Cost of Capital Usually lower interest rates but large amounts involved Usually higher interest rates for quick access Risk Higher financial commitment over long period Less risky due to short repayment time Repayment Spread over many years Within a year or less Collateral Often required for loans May or may not be required Example Use Buying machinery, building infrastructure Paying suppliers, covering seasonal demand
- 12. Conclusion Businesses need both short-term and long-term finance for survival and growth. Choice of source depends on: Purpose of funds Cost of capital Risk involved Smart financial planning ensures sustainability.