FINANCING YOUR COMPANY

Finance is important for any business which requires capital to finance long-term investments and overall working capital. As a company grows and expands, it needs additional capital to purchase non-current assets such as land, buildings and machinery to expand its production capacity, develop and market new products and enter new markets. Even a proportion of working capital, which is required to meet day-to-day expenses, is of a permanent nature and requires long-term capital.

Long-term (LT) finance is typically defined as a type of financing that is obtained for a period of more than a year. Some companies divide finance into three categories: less than one year as short term, one to five years as medium term and five years and longer as long term. For our purposes, we will consider any finance longer than one year as long-term finance.

EXAMPLES OF LONG-TERM FINANCING

Equity Finance: This finance relates to the owners or equity shareholders of business who jointly exercise ultimate control through their going rights. Like Ordinary or equity shares.

Debt Finance: This finance relates to borrowed money to be paid back at a future date with interest. Like: preference shares, bonds and debentures, bank institutional loans, sale and leaseback, hire purchase, securitisationnof asserts, private finance initiative, government grants and assistance.

Short-term finance, also called working capital financing, is used to fund business requirements for workiwng capital. It is normally repayable within one year of the balance sheet date. Its prompt availability enables businesses to seize business opportunities and run their day-to-day operations. There are various sources of short-term finance available which require varying levels of collateral and interest rate expense.

EXAMPLES OF SHORT-TERM FINANCING

External: Companies cannot rely solely on reinvested profits to finance their expansion, the main source of finance are raised from outside the business and these include: bank and institutional loans, overdrafts, bills of exchange, debt factoring, invoice discounting, crowdfunding and web innovations.

Internal: These are funds generated internally by business in it’s normal course of operations. These include: working capital, selling assets and retained profits.