The provision of money for commercial use. The capital requirements of business may be divided into short and medium term, or long term. Short-term capital consists of the current liabilities of a business plus medium-term capital. The main sources of short- and medium-term capital (for a company) can be further subdivided into internal, and external, as follows: Internal: retained earnings, including accrued expenses and tax reserves. See also cash flow; corporation tax; self-financing. External: Temporary loans from sister companies, directors and others; bills of exchange; factoring; trade creditors and expense creditors, and short-term trade investments. Short-term capital should, in theory, only be used for investment in relatively liquid assets (liquid) so that it is readily available to discharge the liability if necessary. Thus, these sources of short-term capital may be used for finished goods in stock and work in progress, trade debtors, prepaid expenses, cash in hand and at the bank.
Correspondingly, the main sources of long-term liabilities or capital can be subdivided in the same way as follows: Internal: Reserves, retained earnings and depreciation provisions. External: Share capital, i.e. ordinary shares, preference shares, long-term loans including mortgages, leaseback arrangements and debentures. Long-term capital may be used for long-term investment in fixed assets (e.g. land, buildings, plant, equipment and machinery, etc.), in goodwill, patents and trade marks and long-term trade investments.
There are important differences in the sources of capital open to large and small firms. The latter do not have access to the stock exchange and rely more heavily upon family and friends for equity capital, as well as upon the commercial banks. The main institutional sources of business finance are the commercial banks, merchant banks, finance houses, discount houses, factoring companies and the institutions concerned with new issues (new-issue market). Insurance companies and pension funds hold a large proportion of all quoted securities (quota-tion). A number of other institutions specialize in providing term loans and risk capital, especially for innovation and smaller businesses.
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