Q.List sources of raising long-term and short-term finance.

Sources of business finance are commonly classified by the period for which the funds are needed, which separates them into long-term and short-term categories.

Basis of the classification: On the basis of the time period for which money is required, sources of funds are grouped as long-term, medium-term and short-term. Long-term financing is generally used to acquire fixed assets, while short-term finance is used mainly for current assets like receivables and inventories.

Long-term sources — meet financial needs for a period exceeding 5 years:

• Equity shares — ownership capital, the most important source of long-term funds.
• Preference shares — hybrid capital carrying a fixed rate of dividend.
• Debentures — long-term borrowed (loan) capital carrying a fixed rate of interest.
• Retained earnings — ploughing back of profits (internal, self-financing).
• Loans from financial institutions (development banks) and other long-term borrowings.

Short-term sources — provide funds for a period not exceeding one year:

• Trade credit — credit extended by one trader (supplier) to another.
• Loans from commercial banks — cash credit, overdraft, discounting of bills, etc.
• Commercial paper — an unsecured money-market promissory note.
• Factoring — selling receivables to a factor for immediate cash.

A note on the middle ground: Some sources are medium-term (more than one year but less than five) — borrowings from commercial banks, public deposits, and lease financing — and public deposits in particular can serve both medium- and short-term needs.