Back to: Financial Management
Hello, class!
It’s great to see you all again. I trust you’re keeping up with your notes and review. Today’s lesson is practical and very important for future financial managers, entrepreneurs, and business owners. We will discuss sources of finance, focusing on short-term, medium-term, and long-term financing options available to businesses in Nigeria.
Lesson Objectives:
By the end of this lesson, students should be able to:
Identify and categorise various sources of finance.
Differentiate between short-term, medium-term, and long-term finance.
Discuss the advantages and disadvantages of each source.
Recommend appropriate financing options for different business needs.
Sources of Finance – Short-term, Medium-term, and Long-term
Definition:
Sources of finance refer to the different ways a business can obtain money to fund its activities. This can include starting the business, expanding it, or financing operations.
These sources are generally categorised based on the time period for which funds are needed:
1. Short-term Sources of Finance (Less than 1 year):
Used for daily operations or working capital needs.
Examples:
Trade Credit: Goods bought now and paid for later.
Bank Overdraft: Bank allows the business to withdraw more than it has.
Credit Purchases: Buying materials or stock on credit.
Factoring: Selling receivables to get immediate cash.
Advantages:
Quick access to funds.
Usually no collateral needed.
Helps manage cash flow.
Disadvantages:
Limited amount.
May carry high interest.
Not suitable for long-term needs.
2. Medium-term Sources of Finance (1 to 5 years):
Used for acquiring equipment, vehicles, or technology.
Examples:
Bank Loans: Loans repayable over a few years.
Leasing: Renting assets instead of buying.
Hire Purchase: Paying in instalments while using the asset.
Advantages:
Spreads cost over time.
Helps grow the business.
Predictable repayment structure.
Disadvantages:
Requires regular repayment.
Interest rates may vary.
May involve legal or financial obligations.
3. Long-term Sources of Finance (Over 5 years):
Used for major investments, infrastructure, or expansion.
Examples:
Equity Capital: Funds from owners/shareholders.
Debentures/Bonds: Long-term borrowing from the public or institutions.
Retained Earnings: Profits reinvested into the business.
Venture Capital: Investment from external firms in return for equity.
Advantages:
Large amount of funds available.
Supports strategic growth.
Equity doesn’t require repayment.
Disadvantages:
Dilution of ownership (in case of equity).
Interest costs (in case of loans/bonds).
Time-consuming to secure.
Summary:
Businesses require different types of finance at different stages. A good financial manager must understand when and how to use each source effectively. The choice depends on purpose, cost, repayment terms, and availability.
Class Activity / Discussion:
Scenario Analysis:
A bakery wants to buy a new delivery van and also stock up on flour for Christmas sales.
Which source(s) of finance would you recommend for each need and why?
Evaluation (Assessment Questions):
What is the main difference between short-term and long-term finance?
List three examples of short-term financing and explain one.
Explain two advantages of using retained earnings for financing.
What is the main disadvantage of equity financing?
Suggest a suitable source of finance for starting a small poultry farm and justify your answer.