Sources Of Finance | Functions Of Merchant Banks

Sources Of Finance | Functions Of Merchant Banks

Source is the place where something could be obtained. Source of finance – capital is the place where funds or financial resources can be acquired. There are several layers of funding that a business can access, amongst the many, here are at least three categories of these classes (i) short term financing sources, (ii) medium term financing sources, (iii) long term financing sources. Short term finance is the fund loaned or borrowed for a period not more than one year. Short term funds are used to finance working capital needs of an entity which may occur as a result of the usual delays in the receipt of proceeds from sales relative to the incidence of expenditures. The short term needs may come in the form of raw materials purchase need, salary and wages payment need, finished goods inventory need etc.

Therefore short term financing source can be defined as any source of funds from which funds are loaned and borrowed for a period not more than one year. It is purely bad financial management to finance medium term and long term funding needs with short term funds. Medium-term finance can be defined as financial resources available for use for periods of between one to ten years. It is used to fill the financing gap between short term and long term financing. It may be used as substitute for long term financing especially for small companies. Medium-term financing source is the place here funds that will last for periods between one to ten years are loaned and borrowed. It is also wrong to finance long term financing needs with medium-term funds.

Long term finance in banking or accounting is defined as financing that businesses can access and make use of it for at least a ten years period, it could be more than ten years. Long-term finance source is the place where long term funds can be loaned and borrowed.

Sources Of Finance – Details of Some Financing Sources

1. Private Savings (Retained Earnings)

These are funds built up through savings from investors’ occupation or income-earning assets. The level of savings depends on the propensity to save, the level of taxation and the propensity to consume. People save to go into a business that they are cut-out for. The saver usually goes into full time business when the level of savings can start-up the project and guarantees its sustainability and profitability. The only cost of personal savings is the opportunity cost of not investing it in something of high return. The only risk associated with savings is inflation risk. That is the effect of inflation between the time of savings and its eventual utilization for intended project.

Savings can be made through savings account, fixed deposit account, short term investments in treasury bills, CBN certificates of deposit, mortgage deposits, goods storage, seedling for agricultural need, foreign currencies or long term investments in estate, lands, motor vehicles, plant and equipment, insurance policies, public warehouse, stocks, shares, children/relative etc.

2. Service contract funds

This is money usually given by a person called master to another called the servant or boy for the freed servant to start up his own business usually the same line of business like his master. The following conditions apply before the servant can have the funds.

• The servant must have been articled to the master for a period of apprenticeship.
• The servant must have served his master loyally and faithfully for an agreed number of years.
• The servant must have acquired adequate knowledge of the intended business. Finance is usually in form of payment of rent for shop, cash, and goods or a combination of these. During the period of apprenticeship the master will feed and cloth the servant.

3. Thrift Societies

These are self help organization or individuals that are locally based, that pool their resources together so as to make it possible for members to save as well as borrow money at very low interest rates from the association for their setting up or financing their business. Articles of association governs the affairs.

Sources Of Finance – Sources of capital include:

• Loans from banks, other unions & financial institutions.
• Shares selling to members
• Retained profit
• Entrance fees of members
• Members’ deposit of savings

Services offered include

• Encouragement of savings
• Payment of dividend
• Provision of welfare services
• Guarantor-ship those who may wish to have access to the loan facilities of the bank
• Credit union

The members of a business, union, church, or other groups who have savings put the money on deposit in the credit union and receive interest. Members of the same group who need cash borrow from the credit union. Because of low operating, investigation and collection costs, a credit union can make small loans at a rate that is usually lower than those charged by commercial sources of credit.

5. Commercial banks

Commercial bank is a retail banking unit that mobilizes deposits and lends in both small and large amounts from/to individuals and firms. It deals with a relatively large number of small and fat accounts. The deposits may be fixed, or on demand with or without interest. Their loans facilities are designed to have similarities as overdraft, which means they are mostly on short term basis. Also it is important to note that services on offer are of different variety, as certain customers are allowed to access certain services, this is mainly for local industries.

6. Merchant banks

Merchant bank is a wholesale banking unit that mobilizes deposits and lend in large amounts mainly from/to institutional investors and firms. It deals with a relatively small number of fat accounts. The deposits are usually fixed and interest bearing. Its loans are more of term loans on long term and medium term basis. The services are of special nature to specialized customers such as equipment leasing, debt factoring, investment management, issue and acceptance of bills and the management of unit trusts.

Sources Of Finance – Functions of merchant banks include

1. serving as issuing house on behalf of clients for debt and equity shares
2. acting as trustees
3. -venture capital provision
4. equipment leasing
5. accepts wholesale deposits
6. managing investments on behalf of clients including investments in unit trusts, pension funds, investment trusts, insurance companies
7. hire purchase facility
8. provide corporate bodies with large-scale long term loans
9. Discount house

Sources Of Finance – Discounted House In Nigeria

A discount house is any person in Nigeria who transacts a discount house business which in the main term consists of trading in and holding of treasury bills, commercial bills and as well as other important securities and whose activities are sectioned by the apex bank, the Central Bank of Nigeria (CBN).

Sources Of Finance – Functions of discount houses include

1. to enhance growth as well as operational efficiency amongst the participants in the Nigerian money market;
2. to act as an intermediary between the central bank of Nigeria and the licensed banks;
3. to facilitate the issue and sale of short term government securities by tender;
4. to provide discount/rediscount facilities for treasury bills, government securities, and other eligible financial instruments acquired by banks;
5. to accept short term deposits from banks.
6. Investment income

Investment income include income from trade, business, profession, vocation property letting employment and pension interest from fixed income investments gain on sale of investment dividends commissions royalties fees, charges, annuities, discounts, dues and allowances.

9. ISUSU

This is mostly referred to as local banking, in this a method of financing a group of individual contribute a fixed sum and hand it over to a member, each person in the group get the same contribution, the exercise will continue until every member of the group receives their own contribution. How much to be contributed for each person depends on what the members agree. The contribution are made without interest and the only cost is the inability of any contributor meeting his obligation. Normally the person with the most urgent need will like to receive his share first.

10. Family funds

A family may have funds to assist member who have the talent to execute projects. The sources of finance is mainly contributions from wealthy members of the family or from ancestral funds. The funds is given out by way of soft loan and repayable within an agreed period. In most instances, the family members bring all their connection and resources together to ensure that a beneficiary business succeeds.