Causes of business finance can be studied under the following heads:
(1) Temporary Finance:
Short-term finance is required to match the current needs of economic. The present needs can include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The need for short term finance arises because sales revenues and buy payments are not perfectly same at the time. Sometimes sales can be little as when compared with purchases. Further sales might be on credit while purchases take prescription cash. So temporary finance is required to match this disequilibrium.
Sources of temporary finance are listed below:
(I) Bank Overdraft: Bank overdraft is very widely used supply of business finance. Under this client can draw certain sum of money over and above his original account balance. Thus it is simpler for the businessman to satisfy short term unexpected expenses.
(ii) Bill Discounting: Bills of exchange could be discounted in the banks. This gives cash to the holder from the bill which can be used to invest in immediate needs.
(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders However; these are also used as source of financing the operations essential to execute the task order.
(iv) Installment Purchases: Purchasing on installment gives more time to create payments. The deferred payments are used as a source of financing small expenses which are to become paid immediately.
(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to consider loan from banks which loan amount can be used as finance for a small amount of time period.
(vi) Financial Institutions: Different banking institutions also help businessmen to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange temporary financial assistance for businessmen in Malaysia.
(vii) Trade Credit: It is the usual practice from the businessmen to buy raw material, store and spares on credit. Such transactions lead to increasing accounts payable of the business which is to be paid after a certain period of time. Merchandise is in love with cash and payment is made after 30, 60, or 3 months. This enables some freedom to businessmen in meeting financial difficulties.
(2) Medium Term Finance:
This finance is required to meet the medium term (1-5 years) requirements of the business. Such money is basically required for the balancing, modernization and replacing machinery and plant. Forms of needed for re-engineering from the organization. They said the management in completing medium term capital projects within planned time. Following are the causes of medium term finance:
(I) Commercial Banks: Commercial banks are the major supply of medium term finance. They offer loans for different time-period against appropriate securities. At the termination of terms the borrowed funds can be re-negotiated, if required.
(ii) Hire Purchase: Hire purchase means buying on installments. It allows the business house to achieve the required goods with payments to be made later on in agreed installment. Obviously that some interest is always charged on outstanding amount.
(iii) Financial Institutions: Several banking institutions for example SME Bank, Industrial Development Bank, etc., also provide medium and long-term finances. Besides providing finance they also provide technical and managerial assistance on several matters.