Sources of Business Finance Test - 24

Lending refers to the funds which are provided by a person or an institution to someone in need of it. There are following forms of lending: 

A. Unsecured loans : These loans does not require any collateral in the form of security. It includes:

(a) Call loans: Call loans refers to loans that the lender can demand to be repaid at any time and does not require monthly or quarterly payments. The rate of interest in case of call money is known as call loan rate which is the lowest among all other loans. 

(b) Short term loans: Short term loans refers to loans that runs for 1 to 12 months and does not requires monthly or quarterly payments.The rate of interest charged on short term loans is more than what is charged in call money. Short terms loans are generally offered for working capital finance.

(c) Medium term loans: Medium term loans refers to loans that runs for one to 3 years and requires monthly or quarterly payments.The rate of interest charged on medium term loans is more than what is charged in short term loans. Medium terms loans are offered to all types of firms and public.

B.  Secured loans: These loans require collateral in the form of security to raise it. It includes long term loans which refers to loans that runs for 3 to 25 years which needs some collateral and requires monthly or quarterly payments. The rate of interest charged on long term loans is the highest in comparison to any other type of loan. Long terms loans are offered to all types of firms and public.

Factoring is a relationship between the seller of goods/services and a financial institution called .the factor, whereby the later purchases the receivables of the former and also controls and administers the receivables of the former. The factor is a third party to the customer who may not feel comfortable while dealing with it.

• Factoring is where firms sell their invoices to a factor such as a bank. They do this for some cash right away  rather than waiting 28 days to be paid the full amount. This is much cheaper way to obtain short term funds than financing through bank credits.

Trade credit is commonly used by business organisations as a source of short-term financing. Trade credits are generally a small amount of finances that are provided by the traders to another trader or a company to ensure smooth flow of trade cycle in the supply chain.

Trade credits are the credits granted to manufacturers and traders by the suppliers of raw materials. These credits are given to a trader from another trader to ensure the smooth running of trades in a business supply chain.

Trade credit is a short term source of finances where a trader credits finances to another trader for the smooth flow of business. Trade credit is a convenient and continuous source of funds as it is a short term credit and has a low amount value hence can be taken without long term financial plannings. This is one of the merits of trade credit.

Factoring is a a financial service which is provided by the factor, it renders various services which include discounting of bills and collection of client's debts, providing information about credit worthiness of a prospective client. Factoring appeared on the Indian financial scene only in the early nineties as a result of RBI initiatives.