Types of Sources of Finance

Banks are not the only place to obtain business funding.money and bolts image by Petr Gnuskin from Fotolia.com

Businesses need finance sources to meet payroll deadlines, acquire equipment, and expand or make business acquisitions, like buying land or other businesses. The time frame can dictate which type of finance source works best for funding. Banks are an obvious choice and work well for covering many short-, medium- and long-term financial requests. However, venture capital, private funding and trade credit are also sources of business financing.

Short-Term Finance Sources

Short-term finance solutions are needed on a daily, weekly and monthly basis to pay for office supplies, rent, utilities, equipment and payroll. Credit cards and trade credit (credit established with local trades and businesses) can assist a business in managing cash flow--the use of itemized statements allow for a clear visual representation of where the cash is being spent and a single payment can be made instead of multiple payments. Many businesses arrange for short-term lines of credit with their bank, referred to as working capital, used to manage everyday business operations. Lines of credit are typically 90-day loans obtained through a commercial bank to assure that payroll and vendors are paid on time, every time.

Medium-term financing is used to fund a special business project or expansion that will increase production and revenue. Banks are a first stop when searching for this type of financing. Through letters of credit and equipment leases, banks can help with some of the financial risks involved with medium-term funding. Venture capital is also a finance source for expansion and special projects. Businesses offer venture capitalists a level of ownership in the business when they contribute funding. Another medium-term finance source is capital contributed by the existing owners---this is an additional investment the business owners make directly to the business coffers and is called owners' equity. Owners' equity is considered a debt owed by the business to the owners of the business.

Any financial need requiring very large amounts of cash receives long-term funding. These sources of finance are generally designed to be paid off in one or more years and not in a few months. Businesses using this type of financing do so to purchase other businesses or buildings or to invest in long-term product development. Bank loans, venture capital and private financing are sources for long-term funding. Long-term business financing can be a combination of funding sources that together cover overall costs. For example, a private finance source (such as a car manufacturer like Ford or Honda) could cover the cost of the initial purchase of fleets of vehicles needed for a business expansion. In addition, a local commercial bank loan could cover the purchase of the buildings to house the vehicles, and a line of credit could be used to cover payroll during the training of all the employees needed to run the expanded business.