Chapter – 12
Finance
Introduction
It is necessary for a businessman to
plan financial aspect in the early stage of starting any new business and it
should not be left to chance. From the starting and to any later expansion in
the firm’s business, finance plays a very important role in purchasing aspects
and to meet the expenses if necessary for carrying on the business affairs. The
financial needs of business are assessed by the size and the nature of work.
For a large business, financial needs are high as compared to a small business.
For example, the joint stock companies require large amount of funds whereas
sole proprietorship and the partnership business require small amount of funds.
Finance can be obtained through two major resources owners’ capital and
borrowed money. The requirements of funds depend upon utilization that is how
much funds will be needed for circulating and fixed capital. The capital credit
obtained from any financial institution is known as borrowed money. Funds which
are required to purchase any asset and to meet the expenses from the initial
stages to the extension of any business is known as finance.
Kinds of
Finance
Long Term Finance
Long term finance is that part of
capital which is required by a business enterprise to finance its blocked or
fixed assets such as land buildings, machinery and other appliances of
permanent nature. In the established undertakings, it is required for extending
the scale production and for the renewal and replacement of the fixed assets,
or for taking the advantages of new discoveries. Thus, it is needed for
considerable period of time, usually for 10 or more years and hence it involves
a high cost due to higher amount of interest.
SOURCES OF LONG TERM FINANCE:
The following are the various sources
of obtaining long term finance.
1. SHARES
The initial capital is obtained by a
new concern by floating shares. Shares represent equal portion into which the
capital of a company is divided. Shares may be issued directly by the company
or through the under writers. Selling of shares is the most important method of
securing fixed capital and the contributors are the general public.
2. BONDS AND
DEBENTURES
To raise sufficient capital and to
draw the attraction of those people who don’t find interest in investment,
debentures are issued b y a company. Debenture is a promissory note for the
repayment of money borrowed and the payment of interest at fixed rates. The
contributor is again the general public.
3. GOVERNMENT
LOANS
The state aid in the form of
guarantee of dividend of new companies, taking of securities, plays a definite
role in the financing of industries. In our country, industrial-finance
Corporation was established to give long term loans.
4. FINANCING
INSTITUTIONS
In Pakistan there are the following
institutions from which different industries can take their finance for long
periods:
A- PICIC
This corporation aims at stimulating
promotion of new industries, the expansion of the existing ones and the
furnishing of the technical know-how as to increase production.
B- IDBP
This bank was setup to provide credit
and other facilities for the development of industries. Other institutions are
NDFC, BEL, investment trusts, insurance companies and commercial banks.
5. PUBLIC
DEPOSITS
An enterprise can raise finance by
the acceptance of deposits from the public directly for fixed terms and at
fixed rate of interest. This method is however, dangerous and has declined in
importance in recent years.
6. PLOUGHING
BANK OF EARNINGS
This is very easy method of financing
and is available to only Established enterprises.re-investment of a part of the
profits is an ideal means of financing, expansion and improvements.
Short Term Finance
A common problem of every business is
financing day –to –day operations. Normally business finances these items out
of the receipts from sales, but some times the firms financing is needed. It is
required for pour hasting raw materials, additional inventory etc. for meeting
purposes’ .it is required for short period ,generally foe one year .it is needs
because of the fact that the stock is to kept ready before it is actually
consumed.
Sources of Short Term Finance
The main sources of obtaining
short–term loans are as following:
1. Commercial
Bank
Finances are acquired from banks by
means of loans, discounts overdrafts etc. they provide short term finance in
the shape of discounting bills, granting loans and accepting bills on behalf of
their customers.
2. Commercial
Credit House
These institutions provide short term
finance against mortgage of property or promissory notes.
3.Proprietor‘s
Personals Funds
This is an important source of
financing a small business. The proprietors themselves supply the capital of
the business from their own pockets. But in large scale undertakings, this
source is insufficient.
4. Borrowings
from Friends and Relatives
Sometimes business is also finance by
taking loans from friends and relatives. Finance from this source is very
limited and uncertain.
5. Public
Deposits
Some units accept deposits from the
public from short period on attractive rates of interest and utilize the funds
for their currents financial requirements.
6. Indigenous
Bankers
There are large number of money
lenders i.e. Mahajan, Sahukar, Shroff in the country who provide considerable
sums for the business, though at a high rate of interest.
7. Land
Mortgagment
The financial institutions give loans
on short–terms to he business man or industrialists on the security of land and
bearable.
8. Foreign
Exchange Banks
These banks also provide short term
funds. They mainly provide finance to the foreign business undertaking of their
nationality.
9. Unsecured
Loans
This type of financing includes:
A) Promissory
Notes
They are the legal instruments used
in advancing banks loans. It is the major source of the short–term finance.
B) Commercial
Drafts
A draft is an instruments made by one
person ordering the second person to pay a sun of money to a specified
individual on sight or at a future date. Secured loans: There are times when
short term financing may be accompanied by collaterals, which gives the lender
the right to seize certain property if the borrower does not replay the loan.
10. Secured
Loans
There are times when short term
financing may be accompanied by collaterals, which gives the lender the right
to seize certain property if the borrower does not repay the load.
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