Uderstand the source of finance avlible to a business Research Paper

Uderstand the source of finance avlible to a business - Research Paper Example The finance requirements for meeting such type of expenses are generally long term in nature. A company can rely upon both its internal and external sources for meeting financing requirements (Beck, Levine and Loayza, 2000). In external sources of financing, a third party gets involved in meeting monetary requirements of a company. External sources of financing accrue cost to the business in respect of their obtainment. The external sources can be of long, short or medium term. Short-term sources of external financing are generally of less than a year’s duration, before it becomes accrued for repayment. Some of the short-term sources of finance are discussed as follows (Beck and Demirguc-Kunt, 2006). Trade creditors are the most common type of short-term finance option, which is available for small, medium and large organizations. Trade creditors refer to the purchase of different items on credit. In this type of a transaction, suppliers allow the business a certain period of lag in payment for the goods purchased. Business can take advantage of the extra time period and invest money elsewhere for generating higher revenue. Factoring is another method of short-term financing whereby a company can receive funds earlier than the due date of its debts. A company may have a large number of debtors, who have purchased goods on credit. As a result, revenue from sales is earned only after a considerable period of time. Fund, therefore, gets trapped for a longer period, harming firm’s liquidity position. Factoring helps a company to procure the finance trapped in credit by way of providing value of debts as security to the factor agent (Goldstein, Ju and Leland, 2001). Discounting of invoice is another very popular means of obtaining short-term credit facilities. In this type of a financing arrangement, a company exchanges its receivable invoices with a finance house, which provides the business with immediate cash. The cash provided is