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Sources of Finance in Banking Industry

Introduction

The banking industry is an important source of finance for the businesses and the companies operating in the banking industry mostly used to engage in activities aimed at providing different sources of finance for personal and corporate use (Bygrave, p137, 1998). For getting credit from the banks to finance the business, one must properly demonstrate the concept, objectives and scope of the business to assure the bank about the capability of repaying the debt. As there is rise in the competition in the banking sector over the last few decades, the banks are introducing new products and services to provide the consumers wide array of choices to get finance from the bank (Baydas et al, p58, 1997).

At present there are different types of sources of finance exist in the banking industry and the UK banking industry is also significantly progressing in providing credits to the people for financing (Boot et al, p679, 2000) . This paper is aimed at identifying the main sources of finance that are available in the banking industry. While focusing on UK banking industry the paper presents an account of all the products that are available to the people and organizations to get finance from banks under different conditions and also describes the main products that the banks offer to provide finance.

Importance and Significance of Subject

Finance in the lifeblood for each and every business because to initiate some sort of business activity and then carry on it required adequate supply of cash to fulfil the business requirements (Rowlatt, p41, 1997). There are different options available to the businesses to get finance for their operations. The businesses can arrange finance either from internal sources like personal saving and contacts or through external sources (Degryse et al, p9, 2001). Among the external sources of finance, the banking industry is the most important and most common source of obtaining finance for the businesses (Pehlivan, p2, 1996).

The banking sector also responds towards the finance needs of the business and there are different products, services and techniques introduced by the banks to provide finance to the people (John et al, p1911, 2007). In this scenario it is very important to have complete knowledge about the available sources of finance in the banking industry so that the individual or organization can select from the sources according to their own requirement and suitability.

Thus there is great importance of studying the sources of finance in the banking industry because banking sector has emerged as an important source of finance (John et al, p1911, 2007) and the business must have deep knowledge about the different sources of finance in the banking industry. This paper is aimed at identifying the main sources of finance in the banking industry while emphasising mainly on the UK banking industry, with the help of the review of the related literature.

The information presented in the paper is significant for the individuals and organizations that are concerned with the banking finance issue and they can get some valuable information from the paper regarding the sources of finance in the banking industry.

Sources of Finance in Banking Industry

The banking industry offers different type of products to the individuals and organizations so that according to their own requirement and conditions that can select the suitable source to finance their business (Berger et al, p2127, 2001). The UK banking industry also provides finance to the businesses through different sources and the businesses and individuals mostly contact the banking industry to get credits for financing their business.

The contribution of the UK banking industry in providing finance is proved from the report of the survey conducted by Federation of Small Businesses (FSB) in 2004 that shows that there 50.8% of the UK SMEs that use to take loans from different banks of the country. It shows that half of the loans are obtained through different sources of finance in the banking industry (Carter et al, p14, 2004). The UK banking industry mainly provides loan for three terms; short term, short to medium term and long term. In order to get finance for all of these terms, there is variety of sources offered by the banks (Bolton et al, p24, 1996).

Lepp (1996) explains that for short term the main sources for getting the finance from the banking industry are the overdraft and invoice discount. An overdraft is the product that is supported by all the features of the current account held by a business. It is a flexible source of getting finance for meeting short term requirements of the company because there is no fixed schedule of repayment necessary to be followed by the businesses.

On the other hand invoice discounting is a confidential debt-financing facility that assists the business in overcoming their cash flow problems created due to over due invoices. This source of finance allows the company access to 80 percent of the invoiced debts and the companies are given this finance on the condition that they can repay the amount when they will receive their debts.

Lepp (1996) explains that for short term to medium term finance, the banking industry offers finance through three different sources that are terms loan, bridging finance and finance and leasing options. Through the term loans, the businesses can get credit for financing with fixed or variable rate of interest and they can repay this amount within one to seven years by following a monthly repayment schedule. Bridging Finance in the source of finance for the businesses that are waiting for the grant cheque or waiting for the drawdown among against their approved commercial mortgages and loan agreements.

On the other hand finance and leasing options are the important source of getting finance from the banks that can accessed to get credit for spreading the cost of insurance, corporation tax or other annual payments. The business also avail this financing facility to hire or purchase the assets, equipments or transport for the organization and they can repay this among against their taxable profits.

Lepp (1996) explains that for long term finance the banking industry offers mainly three type of finance sources that are Commercial mortgage, fixed assets Loan and Specialist. The commercial mortgage can be availed by the businesses to get long term finance from the bank with the objective of purchasing their business premises or to refinance the existing property of the business.

The business can repay this amount over the time period of 15 years and they have three options for them to get the commercial mortgage, these options are straightforward repayment, commercial endowment or a pension mortgage. Another source of long term finance is the fixed asset loan through which the businesses can get fixed amount of load for a time period of 10 years. This loan is grated to them ageists some of their fixed assets including their property, plant or machinery.

In this method the companies also get the opportunity to postpone the capital repayment for a limited time period of up to 2 years under the appropriate conditions. The last source for the long term finance is specialist under which the banks offer a wide rage of specialist products and services to the business and these products and services can assists the companies in funding the expansion, merger or acquisition plans of the business. The following table provides information about the main sources of finance in banking industry under different conditions.

Conclusion

The paper discussed the main sources of finance in the banking industry and it is revealed from the above discussion that banking sector has emerged as an important source of finance for the business and individuals. While responding to the increasing competition in the industry and growing demands of the consumers, the banking industry offers wide range of sources of finance so that the people and organization can access the finance and get debt through the source that is appropriate for them. It is found that different source of finance are available in the banking industry for short term, short to medium and long term finance. It is also revealed from the discussion that the UK banking industry is providing finance through different sources and a considerable portion of credits provided to the business is contributed by the banking industry of UK.

Finance Term Sources of Finance – Products Offered by Banks
Short Term
Overdraft
Invoice Discounting
Short to Medium Term
Term Loans
Bridging Finance
Finance & Leasing Options
Long Term
Commercial Mortgage
Fixed Asset Loan
Specialist

Work Cited

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Boot, Arnoud W. A., and Anjan V. Thakor (2000), Can relationship banking survive competition? Journal of Finance 55, pp679-713

Carter, S. Mason, C., Tagg, S. (2004), Lifting the Barriers to Growth in UK Small Businesses: The FSB Biennial Membership Survey, 2004. Federation of Small Businesses, p14, London

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John Goddard, Philip Molyneux, John O.S. Wilson and Manouche Tavakoli, Developments in European Banking – European banking: An overview, Journal of Banking & Finance, Volume 31, Issue 7, July 2007, Pages 1911-1935

Lepp, A. (1996), ‘Financial Products for MSEs – The Municipal Savings and Loan Banks of Peru’, Small Enterprise Development, Vol.7, No. 2

Rowlatt, A. (1997), ‘Micro finance-Involving Banks’, Small Enterprise Development, Vol.8, No.2, pp: 41-47

Pehlivan, H. (1996), ‘Financial Liberalization and Bank Lending Behaviour in Turkey’, Savings and Development, Vol. 20, p2

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