Question

Which are the two types of finance required by the business concerns? Give examples.

Answer 1

Business concerns require two types of finance which are:

1. Long-term finance:-The funds which are not paid back within a period of less than a year are referred to as long-term finance. Certain long-term finance options directly form a part of the permanent capital of the firm. In such cases, the repayment obligation does not even arise. such as bank loans, bonds, leasing, and other forms of debt finance. and public and private equity instruments. The primary purpose of obtaining long-term funds is to finance capital projects and carrying out operations on an expansionary scale. Such funds are normally invested into avenues from which greater economic benefits are expected to arise in the future.

2. Short-term finance:- Short-term finance refers to financing needs for a small period normally less than a year. In businesses, it is also known as working capital financing. This type of financing is normally needed because of the uneven flow of cash into the business, the seasonal pattern of business, etc. It refers to funds needed to meet day-to-day requirements and for holding stocks of raw materials, spare parts, etc. to be used for current operations.