The biggest problems faced by most business owners is the lack of adequate funds. No entrepreneur can run a business without enough funds and it is not easy to raise funds from the market. Here is a list of different sources you can use to finance the business.
- Indigenous bankers: Country bankers as well as private money lenders can offer you funds for your business. However, they charge high-interest rates and have been known to exploit customers to a large extent. With the development of banks, they have lost their monopoly but there are many businesses which depend on them for a loan.
- Advances: Many businesses get advances from the customers as well as agents against orders and this is an ideal source of short term finance for them. The cost of the loan is low and many firms borrow money to minimize the investment in their working capital. Manufacturing units with a long production cycle prefer to take advances from their customers.
- Trade Credit: Trade credit is basically credit that is extended by suppliers in the course of business. It is an important source of short term finance for businesses and the creditworthiness of the firm is the main basis of securing the credit. It is generally granted on an open account basis where the supplier will send goods to the buyer for the payment which will be received in the future. Many businesses are highly dependent on trade credit. It can also take the form of a bill of exchange where the buyer will sign a bill of exchange which will be payable on a specified future date. For easy and hassle-free short term finance, visit https://www.quantumfinance.com.au/short-term-lending/. Trade credit is a spontaneous source of finance for every type of business.
- Factoring: Commercial banks offer services of factoring where they provide funds by discounting invoices of customers or bills. The firm will get the payment immediately for the sales made on a credit. It is a popular form of borrowing across the world. A factor is a financial institution that offers services related to the management and financing of debts which arise out of credit sales.
- Accrued expenses: Accrued expenses are those expenses which have been incurred but not due and not paid yet. It is a liability for the firm for the services already received. Firms could have accrued expenses in the form of salaries, taxes, wages, and interest. They are used as a source of finance for the short term. The amount of accrual will vary from one firm to another. If the level of activity in a firm expands, the accruals will increase. Since there is basically no interest payable on accrued expenses, it is a free form of financing the business.
- Commercial papers: Commercial papers are unsecured promissory notes that are issued by firms in order to raise short term funds. It is an important money market instrument across the globe but only large companies who enjoy a high credit rating can issue commercial papers to raise funds. Commercial paper is a cheaper source of raising finance as compared to bank credit and it is effective even during tight credit regulations.
- Commercial banks: An important source of short term capital, commercial banks provide funds in different forms. Most part of working capital loans is provided by commercial banks. The borrowing options include loans, overdrafts, cash credits, discounting of bills and purchasing bills of exchange. Borrowing from a commercial bank comes at a cost and the loan amount is either paid in cash or by a credit to the account of the borrower. A commercial bank might ask for security against the loan.
With the increasing number of banks and financial institutions across the country, it has become much easier for business owners to raise funds for their business. However, the interest rate charged by a bank is higher than that of a financial institution or a financial organization that lends funds to borrowers. If the cost of borrowing is low, it will make a huge difference to the business and will make it easier for the business owner to repay the loan. As a business owner or as a borrower, it is advisable to compare the cost of borrowing and the loan tenure before making a decision. Consider one of the above mentioned short term borrowing options for your business. Timely repayment of the interest and principal will ensure a good credit score.