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Advantages And Restrictions Of Each Source Of Finance Money Essay

  1. Sources of Finance
  2. Introduction
  3. Business
  4. Short Term Source
  1. Long Term Source
  2. Medium Term Source
  3. Sources of Finance
  4. Short Term Sources of Finance
  5. Definition
  6. Short-term resources of finance:
  7. Advantages of Trade Credit:
  8. Disadvantages of Trade Credit:
  9. Advantages of Overdraft:
  10. Disadvantages of Overdraft:
  11. Advantages of Expenses Discounting:
  12. Disadvantages of Invoice Discounting:
  13. Advantages of Customers' Advancements:
  14. Disadvantages of Customers' Innovations:
  15. Advantages of Instalment Credit:
  16. Disadvantages of Instalment Credit:
  17. Advantages of Loan from Co-operative bank:
  18. Disadvantages of Loan from Co-operative loan provider:
  19. Medium Term Source of Finance
  20. Definition
  21. Medium term source of finance:
  22. Advantages of Leasing:
  23. Disadvantages of Leasing:
  24. Advantages of Public Deposit:
  25. Disadvantages of Public Deposit:
  26. Advantages of Home loan:
  27. Disadvantages of Home loan:
  28. Long Term Way to obtain Finance
  29. Definition
  30. Long-term way to obtain finance:
  31. Advantages of Collateral Talk about: [ For Shareholders ]
  32. Advantages of Equity Share: [ For Limited Company ]
  33. Disadvantages of Collateral Show: [ For Shareholders ]
  34. Disadvantages of Collateral Show: [ For Limited Company ]
  35. Advantages of Choice Share:
  36. Disadvantages of Preference Share:
  37. Advantages of Debentures:
  38. Disadvantages of Debentures:
  39. Advantages of Retained Earning:
  40. Disadvantages of Maintained Earning:
  41. Advantages of Commercial Finance institutions Loan :
  42. Disadvantages of Commercial Finance institutions Loan :
  43. Advantages of Borrowing :
  44. Disadvantages of Borrowing :

This assignment includes all details about resources of finance. The purpose of the research is to recognize different resources of money like short-term fund, medium-term money and long-term finance. The first part of the assignment provides you an release about sources of finance. The second part protects short-term resources of money and their advantages and limitations. The third part protects medium-term sources of funding and their advantages and disadvantages. And the last part protects long-term resources of finance and its own merits and demerits.

Sources of Finance


As you know food is necessary for individuals life. Similarly funding is the heart of any business. It really is most significant for modern business, which requires huge capital. Financing could be necessary for new businesses, when they retrieve a cashflow problem, new machinery, set up a fresh place or takeover another business. Generally funds required for businesses are classified into short-term, medium term and long-term. In such a section we look at the several source of money and see the advantages and limitations of each.



Public Deposit



-Equity Share

-Preference Share


Retained Earning

Commercial Lender Loan


Trade Credit


Bill Discounting

Customer's Advances

Instalment Credits

Loan from Co-operative banks

Short Term Source

Long Term Source

Medium Term Source

Sources of Finance

Short Term Sources of Finance


When we want to establish a home based business, it is vital to know the quantity of money required. Some options are overdraft, customer advances, loan from co-operatives, cash and trade credit etc. that earn a living for short time. It is called short-term source of funding. Generally Short-term is merely for 1 year. Within this section we find out about above way to obtain fund and their comparative advantages and restrictions.

Short-term resources of finance:

Trade Credit


Discounting of bills

Customer's advances

Instalment Credit

Loan from co-operative bank

Trade Credit : Providing business customers as time passes to arrange for the repayment of goods they have already received. This period is one of the interest free credit. It really is a costly way to obtain finance. Trade credit is employed when the customer is not able to pay the true cost of goods.

1Trade credit identifies credit awarded to makes and dealers by the suppliers of the recycleables, completed goods, components etc. Usually business enterprises by supplies on a 30 to 90 days credit.

Advantages of Trade Credit:

If home based business start up has trade credit, they'll not need additional money in capital. It really is smart to someone who want to start out a new business with less overall.

You can buy goods and make repayment later when you sold all the goods and get some money or make a good income. The period of time may be after 25-30 days and nights.

Business can look in good position without having any serious trouble in immediate payment, which may arranged them again.

Trade Credit enhance the cash flow and offer easy program for business.

With the trade credit, business can focus on other area like sales, marketing and other research.

Trade credit is available only with purchase of raw material or done goods. The word and conditions of trade credit very based on the custom and use of trade.

Disadvantages of Trade Credit:

If repayments aren't made by in time, the business will receive a very bad credit score. They will not trusted in the future, if your business require any loan or trade credit.

If company has a good credit score, it will get trade credit but these can be hard to build up for new business.

Overdraft : It really is a common source of short term financing because of its flexibility. When borrowed fund are not require longer time they can pay easily and quick. The risks to the lending company are less then a long term loan since it is very cheap.

2When a loan company allows its depositors or members to withdraw profit excess of the total amount in his consideration upto a specified limit, it is recognized as overdraft center. This limit is granted purely based on credit-worthiness of the customer.

Advantages of Overdraft:

Flexible 3 - An overdraft will there be when you need it and cost is zero (in case there is small cost) when you do not need. It gives you to make essential obligations whilst chasing after up your own repayments, and really helps to maintain cash flow.

Quick - It is very easy and quick to arrange, providing a good cash flow backup with the the least fuss.

It allow to make essential repayment whilst running after up your own repayment and help maintain cash flow. You only need to acquire the thing you need in those days.

Disadvantages of Overdraft:

Cost - Sometimes it carry very higher rates of interest and fees then loan. This makes them very costly.

Recall - The bank can take again the whole overdraft amount anytime if you have cracked terms and conditions or it may happen if you neglect to make other payment.

Security - Overdraft might need to be secured against your business property, which put them in danger if you are unsuccessful in repayment.

Bill Discounting : Some lender provide short-term loan by discounting invoice of exchange. In such cases lender deduct discount while making payment. The quantity of discount is normally equal to the amount of interest for the rest of the period of payment. The advantages and disadvantages out of this source are following.

4When these document is presented before the loan company for discounting, banking institutions credit the total amount to customer's bill after deducting discount. The amount of discount is equal to the quantity of interest for the period of bill.

Advantages of Expenses Discounting:

Availability of cash - The drawer gets cash immediately by the discounting costs. He does not have to hold back for the repayment until the expiry of credit period mansion on the costs.

Security - Bank normally do not require some other security while making repayment against the charge reduced. However if customer is interested, finance institutions also give him limit for discounting of invoice. This limit is identify as a 'limit against discounting monthly bill. '

Nature of responsibility for repayment - Repayment of money advanced against low priced bill is the duty of the drawee of costs of exchange. In case drawee does not pay or refuse the pay, the drawer who got payment after discounting the costs is held in charge of payment.

Disadvantages of Invoice Discounting:

Advance payment of interest - While discounting a invoice, bank or investment company deduct the discount and balance is acknowledged in customer's profile. This discount is similar to the amount of interest for the remaining period of repayment. Thus a person getting money through discounting of expenses provides move forward interest on the amount of bill.

Facility is at the mercy of the gatherings credit - Normally lenders extend this center after being satisfied with the credit of get-togethers involved. Bank may be require some security. So, it isn't a easy available center.

Problem when non-payment - Charges not paid after maturity are to be accredited by Notary Public and a specific amount in the form of there is nothing paid. Thus it became yet another burden.

Customers' Developments : The advance make by the client against the value of order set. Thus the remaining amount of goods to be offered later. Let see additional information about the advantages and limitations.

Advantages of Customers' Advancements:

Interest Free - Amount offered as progress is interest free. Hence the money are available without any concerning problem.

No Security - Owner is not required to deposit any major security while demanding advance from the client. Thus assets remain cost-free.

Repayment - Ones money received in advance will not be refunded. Hence there are no types of procedures for repayment.

Disadvantages of Customers' Innovations:

Limited amount - Amount received from a person is at the mercy of the worthiness of order. Borrowers demand may become more then the move forward amount.

Limited Period - The period of move forward amount is merely up to the delivery goods. It cannot be renewed.

Penalty - Normally innovations are subject to the condition that if goods aren't delivered promptly then order would be terminated and advance amount would be refunded with interest.

Instalment Credit : Instalment credit is a system under which a little payment is made during taking the products and left over amount is paid in instalment. Generally instalment amount is including of interest. Advantages and limitations of the system are as under:

Advantages of Instalment Credit:

Ownership of advantage - Delivery of good is reassured immediately on repayment of deposit.

Convenient repayment of investments - Costly assets which can not purchase immediately with full repayment can be purchase by instalment payment.

Saving of 1 time investment - If the price of property is high and lumpsum amount is manufactured then the business finance are blocked. In this case instalment credit causes saving of one time investment.

More facility for business - When the facility of repayment in instalment can be found then business firm are able to by new furniture, equipment or other necessary things. Thus, your business reputation appeared in good shape by instalment credit.

Disadvantages of Instalment Credit:

Commitment for repayment - Payment in instalment is a committed action. So you have to pay your instalment in whatever condition of your business.

Necessary to pay interest - Repayment of interest is essential in this technique. Generally sellers bill very high rate of interest.

More interest - If buyer neglect to pay the instalment, retailer sometimes impose penalty or additional interest.

Loan from Co-operative loan company : Co-operatives finance institutions are good source of short-term finance. Account is the primary condition for securing loan in this bank. This bank give loans for personal and business purposes too. The advantages and limitations of the loan company are as under:

Advantages of Loan from Co-operative bank:

These lending options create a feeling of thrift among the list of low-income group.

Being an associate of co-operative standard bank, the borrower can participate in the management.

Loan generally awarded at a lesser rate of interest.

Loan from this banks are often available.

Loans are given for good purposes that help to develop the financial and public status of the folks.

Sometimes these banking institutions organise training curriculum for member to familiars them with the many avenues of the business and regarding proper utilisation of loan money.

Disadvantages of Loan from Co-operative loan provider:

These loans can be found only to customers.

Loan out of this bank can be found only for limited purposes.

Co-operative banks rely upon the helps of the federal government. So, government regulations sometimes may be makes in big trouble to the borrowers.

These bank find it hard to ensure repayment of loan money scheduled to limited information about the need and utilisation of fund by the customer. There may be little scrutiny of the repaying capacity of the loan seeker during granting loan.

Medium Term Source of Finance


Medium term way to obtain finance means fund does not require more then 3 years. Normally medium term cash are require by business for repairing and maintenance of equipment or other equipment. So organization get this financing from loan company or other kind of source.

Medium term source of finance:


Public Deposit


Leasing : Leasing is the method of capital money requirement. Leasing predicated on the principal that income is gained from the utilization of a secured asset. The advantages and restrictions of leasing are following:

Advantages of Leasing:

Reduced initial cash flow - The big good thing about leasing equipment is that the cost is spread over a number of years. You have not to pay the complete amount upfront. This assists to maintain cashflow. Poor cash flow is the key cause of small company and leasing can help you to keep it under better control.

Budgeting - Normally this is a fixed contract. So the amount can be did the trick into the business budget a lot more easily.

Tax Advantages - lease rentals are believed as an operating cost. So it is possible to deduct them from taxable revenue. However, prior to the contract you should always check the equipment you are buying is entitled or not.

Security - If you lease the merchandise, you are not owner of this product. This means the leasing company gives better security. You do not need any further security to be able to start a deal.

Disadvantages of Leasing:

No ownership - Main downside is that you are not the owner of the product. It means the leasing company is the owner during and after the lease. As you do not own the merchandise, you are unable to sell it in the event it is no more needed, and you simply cannot up grade to a newer or better product without either paying down the remaining contract, or paying a sizable payment to cancel the agreement.

No sell - As you are not owner of the product, you can not sell it. If you do not longer needed, you have to pay large fee to cancel the contract.

Termination - Leases are extremely difficult to terminate early on.

Long term expenditure - Although renting allow you to avoid paying a big amount, but after quite a while it works out somewhat more expensive. Over the period of standard rent, you pay the actual cost of product and other charges.

Maintenance - You are responsible for maintenance of the product. If you have not trained worker to fix the gear, this could be more costly in the serious mistake. Some leasing company will allow you to cover maintenance cost nevertheless, you have to pay a little extra amount.

Commitment - Once you signed a lease contract, you are committed to making payment for the whole rent period even you stop utilizing a property.

Public First deposit : It is very old and popular way to obtain funding. When modern banking companies were not established, people used to deposit their conserving with respected business. The maturity period for general population deposit is bare minimum six months and maximum three years. The advantages and drawbacks of public deposit are following:

Advantages of Public Deposit:

Easy to deposit - The method of borrowing money from people is super easy. It does not require many legal formalities. It needs to be publicized to be paper.

Easily available - If companies have good reputation, they are able to obtain funds immediately from public without any more financial issues.

Income tax purpose - Interest paid on this deposit is a deductible expenditures for income tax.

Fix rate - The rate of interest on this deposit is fixed, it helps the company that can be played trading on equity, if the business is earning more then the rate of interest paid on public deposit.

Flexibility - Open public deposit bring more overall flexibility in the framework of the administrative centre of the company. These can be lifted when needed and refunded when not needed.

Disadvantages of Public Deposit:

Insecurity - General public deposits have no charge on the resources of the business. So it can be not safe to deposit saving in those companies which are not very popular.

Uneconomical - The rate of interest paid on public deposit may be low but there are other expenses like commission, which make it uneconomical.

Short period - Public deposits can be found mainly for short period. So company cannot depend on it for a long period.

Misuse - The management may misuse your deposit. So in cases like this it is not secure.

Bad influence on capital market - It really is a fairly easy and cheaper way to obtain bringing up money. Thus, more money deposited with the firms, you will see less investment in securities. Hence the administrative centre market won't grow.

Mortgage : A mortgage is a loan specially for the purchase of property. The borrower may use theirs own property as security for the loan. The advantages and limitations of mortgage loan are following:

Advantages of Home loan:

Tax advantages - The interest repayment on the mortgage loan are tax deductible.

Good cash flow - With the use of mortgage, it is possible to usage of capital that you'll not as a rule have access with nominal up-front payment and the flexibility in management of repayment plan.

Cash movement management - Mortgage loan plan are pre-set, so you can make plan for future cash management.

Disadvantages of Home loan:

Collateral - The nature of a home loan require you to pledge the purchased property to the lender. When the mortgage is repaid, the owner is obligated to release the mortgage and it is require to make available any federal formalities.

Defaults - The lending company may define a number of events that will constitute a default on the mortgage loan, including inability to make any repayment on time, individual bankruptcy, insolvency and breaches of any responsibilities in the mortgage agreement. Try to negotiate an advance written notice of any alleged default, with an acceptable timeframe to cure the default.

Long Term Way to obtain Finance


Long-term source of finance are those that are need over a longer time of the time. Generally time duration may be more then 5 years. Long-term money are necessary for fund expansion, setup new office, buying home based business or fixed belongings like furniture, building, equipment, land etc. Cash require because of this business is called long-term fund. The amounts of long-term capital depend after the size of business and aspect of business.

Following various resources of long-term finance and benefits and drawbacks of each source.

Long-term way to obtain finance:


Equity Share

Preference Share


Retained Earning

Commercial Bank Loan


Shares : Stocks is the main way to obtain long-term fund. The joint stock companies concern shares to everyone. These shareholders are the owners of the company. There are two types of shares (1) Equity Show (2) Preference Share. Company divides its capital into devices of particular value like 10 each or 200 each. Each unit is called show.

Equity Talk about - Dividend on these shares is paid after the resolved rate of dividend has been paid on the desire share. The speed of dividend is not set because it is depend upon the profit available. The equity shareholders control the affairs of the business and also have an unlimited involvement in the company's revenue. Advantages and drawbacks of equity show are pursuing:

Advantages of Collateral Talk about: [ For Shareholders ]

Income Earnings - The equity shareholders are the residual claimants of the income. The company may add to the gain trading on collateral. Thus equity capital gets dividend at saturated in good period.

Rights - Equity shareholders have right for voting to right people as directors who is able to control and manage the affairs of the company.

Transferable - These stocks are transferable models.

The value of collateral share rises in the currency markets with increase in profit of the concern.

Advantages of Equity Share: [ For Limited Company ]

A company can lifted set capital by issuing collateral shares without creating any charge on its predetermined assets.

The capital lifted by issuing equity shares is not needed to be repaid during the life time of the company. It will be paid back only when the business is finished up.

There is no liability on the business regarding repayment of dividend on equity shares. The company may declare dividend only, if there are enough revenue.

If a corporation increase more capital by issuing collateral shares, it causes greater confidence on the list of investors and creditors.

Disadvantages of Collateral Show: [ For Shareholders ]

Irregular income - The dividend on collateral share is subject to availability of profit. If there are choice shareholders, they get first dividend before equity shareholders. Equity shareholders gets no dividend if company has not enough profit.

Capital damage - During recession period, the income of the company come down and the pace of dividend also come down. Due to low rate of dividend the market value of collateral shares goes down producing a capital reduction to the buyers.

Dilution in charge - Each deal of equity stocks dilutes the voting ability of the existing equity shareholders. Collateral shares are transferable and may produce centralisation ability in few hands.

Impossible trading - If collateral shares only are issued, the business cannot trade on collateral.

Over capitalisation - If company issue more equity shares may lead to over capitalisation. For the reason that condition dividend per show is low which make bad influence on investor.

High cost - It cost more to finance with equity stocks then with other securities as the offering costs and underwriting commission payment are paid at a higher rate on the problem of these stocks.

Speculation - Equity stocks of good companies are at the mercy of hectic speculation in the stock market. Their prices change frequently that are not in the interest of the company.

Disadvantages of Collateral Show: [ For Limited Company ]

No trading on equity - Trading on collateral means ability of any company to improve fund through preference shares, debentures and mortgage etc. On such funds the company has to pay at a fixed rate. This allows equity shareholders to enjoy a higher rate of come back when profits are large. The major part of the profit gained is paid to the collateral shareholders because borrowed funds take only a fixed interest. But if a firm has only equity shares and does not have their preference stocks, debentures or loans, it cannot have the advantage of trading on collateral.

Conflict of interests - As the equity share holders hold voting rights, organizations are made to place the votes and get the control of the company. There develops issue of interest which is unsafe for the even functioning of any company.

Preference Talk about - Rising capital by problem of these shares is a most important method of increasing long-term funds. Preference shares are the shares, which bring initial rights over the equity stocks. These shares are receiving dividend at a fixed rate. All shareholders gets dividend regularly. The advantages and disadvantages of preference share are following:

Advantages of Choice Share:

Fixed income - The dividend payable on preference shares is on fixed rates even when there is no income.

First right - Choice shareholders have first right to get dividend. Thus they benefit from the minimal risk.

Less capital deficits - As the initial right of repayment of the capital in case there is winding up he company, it will save you them from capital loss.

Fair security - Desire share are reasonable security for the shareholders during depression period when profit of the business are down.

Disadvantages of Preference Share:

No Voting right - Desire shareholders have no any voting rights in the company.

Fixed income - The dividend payable on desire shares is on fixed rates even if the company earns higher earnings.

No state on surplus amount - The shareholders have no rights to lay claim on surplus amount. They are able to only ask for the capital investment in the company.

Not secure - They can not be secure on the business's assets.

Debentures : Whenever company want to borrow a large amount of money for long but preset period, it can acquire from everyone by issuing loan license called debenture. The holders of the debentures are the creditors of the business. The total amount is divided into units of fixed amount. These are wanted to the genera people to subscribe in the same manner as in done in the case of share. A debenture is issued under the common seal of the company. It really is a written acknowledgment of money borrowed. For instance, if company need 5, 000, 000 for 10 years, it will granted debentures. Each cost of debenture may be 100.

Advantages of Debentures:

Creditors - Debenture holders are the creditors of the business.

Allowing control over the company - Debenture holders have no right either to vote or be a part of the management of the business.

Reliable Source - These are repayable after a fixed period of time, the business can make the best use of money. It can help long term planning.

Tax benefit - Interest paid on debenture is cared for as a price and is recharged to the income of the company. Thus the company saves tax.

Safety - Debenture are more secure. When the business is winding up, these are repayable before any repayment is made to the shareholders.

Disadvantages of Debentures:

More finance more difficulty - Debenture finance enables a company to trade on collateral. But more money leaves little for shareholders, as most of the gains may be require repaying interest on debentures.

Burden with time of major depression - During depression time the revenue of the business decline. It may be difficult to pay interest on debenture. As interest goes on accumulating, it could lead to the closure of the company.

Can't borrow money - Usually debentures are secure. The company creates a fee on its possessions in favour of debenture holders. So the company, which does not have own enough investments, they cannot borrow funds by issuing debentures.

Burden - As the interest on debenture have to be paid each year whether there are income or damage. It becomes burden in case of company incurs loses.

Retained Earning : The area of the profit which is not distributed on the list of shareholders but is retained and is utilized in business is named retained earning. According to Indian company Action. Companies are require to copy a part of their income in reserves. The total amount so retained in reserve may be used to buy fixed belongings. That is called internal funding.

Advantages of Retained Earning:

Cheap - You can find no expenditures behind getting capital from this source. There is no obligation on the part of the company either to pay interest or repay the money. It could safely used for business.

Financial Stableness - A corporation which has enough reserves can face ups and downs in business. Such companies can continue with the business even in melancholy, thus building up its goodwill.

Good for shareholders - Shareholders may get dividend out of reserves if the company does not earn enough income. Because of reserve, there is capital gratitude, i. e. the worthiness of shares go up in the talk about market.

Disadvantages of Maintained Earning:

If Huge revenue - This method of financing can be done only then there are huge revenue which too for many years.

Dissatisfaction - When money build up in reserves, bonus shares are given to the shareholders to capitalise such cash. Hence the company must pay more dividend. By retained earning the real capital will not increase while the liability increases. In the event bonus shares are not issued, it could create a situation of under-capitalisation because the speed of dividend will be much higher when compared with others.

Monopoly - Through ploughing back again of gains, companies increase their financial durability. Companies may throw out their competition from the marketplace and monopolize their position.

Mis-management of money - Capital gathered through retained income encourages management to invest carelessly.

Commercial Bank Loan : Some commercial banks giving loans for an extended period. i. e. for more than ten yr. The period of repayment of long is expanded at intervals long period. Commercial finance institutions provide long-term finance to small level products in the goal sector.

Advantages of Commercial Finance institutions Loan :

It is a flexible source of financing as lending options can be repaid when the necessity is satisfied.

Finance is available for a definite period, hence it isn't a everlasting burden.

Banks keep the financial operations of their clients secret.

Less time and cost is engaged when compared with issue of stocks, debentures etc.

Banks do not interfere in the inner affairs of the borrowing matter, hence the management keeps the control of the business.

Loans can be paid-back in easy installments.

In case of small-scale sectors and establishments in villages and backward areas, the eye priced is low.

Disadvantages of Commercial Finance institutions Loan :

Banks require personal warranty or pledge of investments and business cannot raise further lending options on these assets.

In case the short-term loans are extended again and again, there's always uncertainty relating to this continuity.

Too many formalities should be fulfilled for getting term lending options from banks. These formalities make the borrowings from bankers time consuming and inconvenient.

Borrowing 8 : Most business rely on borrowings as well as collateral to finance businesses. Lenders enter into a contract with the business enterprise in which the rate of interest, dates appealing payment, capital repayments and security very good the borrowing are evidently stated. In the event that the interest payment or capital payments are net made on the payment dates, the lender will most likely have the right, under the terms of the deal, to seize the advantage on which the loan is secured and sell them to be able to reply the total amount spectacular, security for loan may take the proper execution at a fixed charge on particular investments at the business or a floating charge overall at its possessions. A floating demand will 'float' above the assets and will only fix on particular assets when the business enterprise defaults on its borrowing responsibilities.

Advantages of Borrowing :

Local savers might provide less costly cash; an important behavior among clients and the public is rewarded.

Lower interest loans provide experience for the business in lent funds

Local bank become familiar with micro and small organization potentials.

Access to greater sums more quickly based on track record.

Allow long run projections than grants

Provides a discipline similar compared to that of micro and small venture clients.

Disadvantages of Borrowing :

Too many subsidized lending options can retard move to market rate.

Loans may be dollarized in inflationary situation.

Local banks may not be eager to be cooperative.

Early negotiations need a new set of skills and contracts.

More tricky cashflow management as primary is repaid.

More high-risk as debts holders can induce closure of company

Substantial initial guarantee requirements.

Higher financial costs force organizational decisions and changes.

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