This type of financing is known as Debt financing.
Businesses also raise funds by offering their stocks or shares to different financial institutions including banks and insurance firms, governments and general public at a defined ‘Par or Stated’ value with or without a premium depending upon the market prices. A firm can issue a maximum number of shares that are known as Authorized shares and can’t exceed that limit. Shares issued are known as Outstanding shares. Dividends are paid to shareholders who have owned the shares.
Short term loans can be either ‘secured’ that means that specific assets such as inventory are pledged as collateral or they can be unsecured that means the firm has not promised any assets as collateral. These loans are usually acquired from different financial institutions such as commercial banks, insurance companies or from financial groups such as private investors, individuals with savings and small/medium banking institutions at relatively higher interest rate to meet their current needs of finance.
A commercial paper is an unsecured debt (in other words a ‘promissory note’) taken by businesses to finance the inventory purchases and various short-term liabilities such as wages, rent, fuel etc. Undoubtedly, they mature in less than 9 months or 270 days and have a lower interest rate than what a bank normally charges from its clients. Only the large businesses with extensive financial resources, strength and power are able to sell commercial papers compared to small and medium scale enterprises, which do not enjoy extensive capital resources.
Sales of stocks and bonds are a major source of finance for public limited companies, multinationals and large scale corporations. The sale of shares results in cash inflows for the issuing firm and the buyer receives an ownership in that firm. Whereas, the sale of bonds receives an interest payment (calculated through the interest rate) along with the