Question

If you were running a business and needed more cash, would you take out a short-term loan, a long-term loan or issue more stock? Why? Find

which is the best option?

Answer 1

It is true to say that CASH is the blood in the business. without cash we cannot run the business neither small or big business firms. so cash is essential for any business. Now, the question arises whether we take short term , long term loan or go to the stock that is issued shares for the firms. But all these are depends upon the size, nature and structure of the business.

whether we take short term, long term or issue stock that is a crucial decision and the firm have to take by considring all round and its consequences. also considered whether firm go for one year or more than that depends upon the vision of the firm in near future.

Short Term Loan:

These are those loan which are provided for short tenure of less than one year but it may be extanded by financiAL institutions for a period of 1-2 years.These are mostly unsecured , it means firm do not have to pledge a collateral as security to avail them .There are five types of short term finance available in the market :

-Trade credit

-Bridge loans

-Demand loans

-Bank overdraft

-Persanel loans

Out of these trade credit posibly one of the most affordable source of obtaining interest free funds . Under this lender would give time to pay purchase without incurring any additional cost

Long Term Loan:

Long term loan refer to those loan that have longer tenure or repayment period . It will be range from 1year to 30 year. Most firm take these loan according to their requirement and help in resolving diverse financicial needs and can be easily repaid in small installment or EMIs without causing any trouble to the borrower.

Such loan allows the organisation to enjoy maximum benefit .These loans are help to the small business to all major public and priivate sector .These loans can be sanctioned for purchasing new equipement or expending business.

Long term loan also avalable for high loan amount and are mostly secured in nature and also enjoy benefit of low rate of interest on long term loan with easy EMIs .

Long term loan also provide tax benefit as they reduce the taxable income.

Issue More Stock:

Corporation issue shares of stock to raise money for their business. The shares that are issue represent the amount of money invested by the share holder in the company where the share holder have an owernship stake in the company and enjoy voting right and receipt of dividend.

Issuing stock IS MADE BY TWO WAYS one when business is new and second for growth purpose as capital is neccesary for that first we analysis how much money needed in the business .

Issuing stock have various advantage:

-For new business with poor rating , acquiring debt may be too costly so its better .

-Issuing stock leaves with more cash available compare to debt financing.

-More debt may result to more risk so its better to issue stock.

-If business fails then loan amount is paid by selling of assets but issuing stock protect from that stage.

So it is upto the firms whether they take short term ,long term or go by issuing stock totally depends upon the nature, size, assets and liabilities of the organization for the periods.

Out of the three amount which is free from any liabilities and also benefit to th eorganization is better and firm go with that option. Also depends upon whether firm is new or existing .