What is definition of business finance and explain its types?

Finance represents the money management and the process of acquiring the funds. Finance is a board term that describes the activities related to banking, leverage or debt, credit, capital markets, money and investments.

Business finance tells about the funds and credit employed in the business. It also helps to manage the funds/money to make your business more profitable by considering financial statements (profit and loss accounts, balance sheets and cash flow statements).

Types of Business finances

The types of business finances are explained below −

  • Short term finance

Financing the business for a short period of time (less than 1 year) is short term finance. It is also called working capital financing. Trade credit, working capital loans, invoice discounting, factoring, and business line of credit comes under short term finance.

Advantages of short term finance are less interest, disbursed quickly and less documentation.

Main disadvantages of short term finance are the money which we get is smaller, it has fixed period of loan, interest rates keep on increasing, effects business and its liquidity.

  • Medium term finance

This will be considered for two reasons, one when long term capital is not available and secondly, when deferred revenue expenditure write off period is three to five years.

Financing for a period for medium term is between three to five years. Preferred shares, Bonds, lease finances, etc. comes under medium term finances.

Medium term loans are more conservative than long term investments, but involves more risk than short term. It often looks for balance between risk and return.

  • Long term finance −

It is provided for a period of more than ten years. Long term finance is also called fixed capital finance. Equity capital, preference capital, Debentures, term loans, retained earnings comes under long term finance.

The main purpose of getting these kinds of finances is to carry out the business on an expansionary scale from which, greater economic benefits are expected to arise in future.

Updated on: 06-Aug-2020

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