Sources of Finance

Types of Finance:

• Short term finance: Short-term finance refers to funds that are borrowed for a period of up to one year. These sources are typically used to cover immediate expenses, manage cash flow, or finance short-term projects.
  • Examples include credit cards and bank overdrafts.
• Medium term finance: Medium-term finance is used for financing projects or expenditures that require funds for one to five years. This type of financing is often utilised for purchasing equipment or expanding operations.
  • Examples include bank loans and hire purchase agreements.
• Long term finance: Long-term finance refers to funds that are borrowed for more than five years, often used for significant investments such as infrastructure, acquisitions, or long-term strategic projects.
  • Examples include mortgages and debentures.

Factors to consider when choosing a source of finance:

• Cost: This includes interest rates and fees associated with the finance. Lower costs are preferable but may come with stricter terms.
• Purpose of Loan: The intended use of funds determines the appropriate finance source. Short-term needs suit options like overdrafts, while long-term projects might need loans or equity.
• Security: Some financing options require collateral. Secured loans need assets as security, which is risky if repayment fails, while unsecured options have higher interest rates.
• Control: Debt financing usually lets businesses retain control, whereas equity financing might require sharing control with investors.