Short-Term vs. Long-Term Funds

• Short-term funds are used to finance supplies and payrolls, typically obtained for one year or less.
• Long-term funds are used to purchase buildings, machinery, and equipment with a lifespan exceeding one year.

Short Term Sources of Funds

• Short-term sources of funds represent current liabilities.
• Bank overdrafts occur when more money is withdrawn from an account than deposited.
• Account payable is also referred to as trade credit.
• Bill finance involves bills of exchange, either domestic or foreign.
• Deferred tax payments arise when a tax obligation accumulates in one financial year.
• Tax payments can arise from self-imposed obligations or late assessments.
• Factoring is when a business sells its accounts receivable to a third party.
• Receivables factoring is when a company buys a debt or invoice from another company.
• Hire purchase is an agreement to buy consumer goods with a down payment, followed by installment payments with interest.
• Stock finance represents secured loans based on the value of raw materials stock.
• The cost of a bank overdraft depends on the borrower's creditworthiness, offered security, and bank assessment of company management, with interest rates above the bank rate.

Major External Sources of Long Term Funds

• Financial institutions are a major external source of long-term funds.
• Capital markets, both organized and unorganized, are also major sources.
• Firms raise money from the capital market by issuing common stock and instruments of debt.
• Common stock is also known as equity shares or ordinary shares.
• Risk capital is contributed by shareholders.
  • Common stockholders receive dividends based on company sales.
  • Preferred stockholders receive a fixed dividend.
• Preference shares occupy a position between common stock and debenture stock.
• Preference shareholders are entitled to a fixed dividend payment.

Types of Preference Shares

• Cumulative preference shares entitle shareholders to receive unpaid dividends from past years if the company could not pay them earlier.
• Non-cumulative preference shares do not accumulate unpaid dividends.
• Participating non-cumulative preferred shares offer a fixed dividend rate but no right to participate in residual profit.
• Participating cumulative preference shares entitle participation in a firm's residual profit.
• Redeemable preference shares are normally redeemed after a fixed period.
• Irredeemable preference shares do not have a definite maturity period.
• Convertible preference shares allow holders to convert these shares into equity shares.