Sources of Finance

Short Term Finance

Short Term Finance consists of funds borrowed for a period of less than one year, typically used for working capital needs or immediate expenses. Some examples include:

• Bank overdraft: A facility provided by banks that allows an account holder to withdraw more money than is available in their account, up to an agreed limit, usually with interest. Bank overdrafts are available to households and businesses.
• Trade credit: An arrangement where a supplier allows a business to purchase goods or services and pay for them at a later date, often within 30 to 90 days.
• Credit card: A payment card issued by banks allowing users to borrow funds up to a certain limit, which must be repaid with interest if not paid in full by the due date. Interest is generally very high, however this type of credit is easy and convenient to access.

Medium Term Finance

Medium-term finance refers to funding obtained for a period typically between one to five years. It is used for investments or expenses that are not immediate. Some examples include:

• Medium term loan: A medium-term loan is a loan with a repayment period typically between one to five years. It is often used for business expansion, purchasing equipment, or other significant investments.
• Hire purchase: Hire purchase is a method of acquiring assets where the buyer makes an initial down payment and then pays the remaining balance in instalments. Ownership of the asset transfers to the buyer after the final instalment is paid.
• Leasing: Leasing is a financial arrangement where a company or individual pays to use an asset, like equipment or property, for a specified period. The lessee makes regular payments to the lessor but does not own the asset at the end of the lease term.

Long Term Finance

Long-term finance refers to funding obtained for a period exceeding five years. It is used for significant investments like buildings, machinery, or other large-scale projects. Some examples include:

• Long term loan: Long-term loans, such as mortgages or debentures, are loans with repayment periods usually longer than five years. Mortgages are loans used to buy a property, secured against the property. Debentures have regular interest repayments, with the principal repaid at a later date.
• Share capital: Share capital is the money a company raises by issuing shares to investors. Shareholders gain ownership in the company and may receive dividends and voting rights.