Chapter 18, Problem 1CT

Summary Introduction

To think critically about: The primary sources of short term funds and long term funds for new business owner.

Introduction: Short term sources of funds refers to funds required in a business for a period of less than whereas long term sources of funds refers to funds required in a business for a period of more than 5 years.

Explanation of Solution

The primary sources of short term funds and long term funds for new business owner are explained as below:

Short term sources of funds are as follows:

• Trade credit: It is a short term sources of finance in which there is an agreement between the buyer and seller where buyer can purchase goods or services on credit and make payment at later date.
• Factoring services: It is a process in which company sell its account receivable to third party at discount in order to increase capital.
• Short term loans: Like secured and unsecured loan.
• Commercial paper: It is a short term sources of funds which are available to large corporate when they need just for a few months.

Long term sources of funds are as follows:

• Equity financing: It is a long term sources of finance where entity raise its finance by selling entity’s stock to investors.
• Debt financing: It refers to a method of raising finance from any financial institution which is to be repaid along with interest.
• Venture funding: It refers to a method of financing where venture capitalist invest his money in new startup and emerging business believing that business is having great profit potential.

Conclusion

Thus, the primary sources of short term funds are trade credit, factoring service, short term loans and commercial paper and long term funds are debt, equity , venture funding and assets securitization.