In business, "spontaneous finance" refers to financing that arises out of regular, day-to-day operations. Unlike with other common sources of financing, such as loans or bonds, obtaining additional spontaneous financing doesn't require any special action by the company; it just "happens," hence the name spontaneous. The two primary sources of spontaneous finance for most businesses are trade credit and accruals.
What's Meant by Finance
The "finance" in spontaneous finance doesn't simply refer to money; it refers to someone else's money. Think about purchasing a car. "Buying a car" means making a deal for the vehicle and driving it off the lot. "Financing a car" means taking out a loan to make that happen. In business, money that comes in from customers isn't typically referred to as financing. It's revenue, and it belongs to the company. Money or something of value that belongs to an outside party but is used by the company is financing.
Trade credit is an essential source of spontaneous financing for most ongoing businesses. Trade credit is a "buy now, pay later" arrangement. For example, a store orders 100 boxes of chewing gum from a supplier. The supplier delivers the boxes and sends the store a bill. That's trade credit. Until the store pays the bill, the supplier is in effect financing the store's chewing gum inventory. When the store's business volume increases, it will order more inventory, using more trade credit. When business falls off, it orders less inventory and uses less credit. Bills owed on trade credit are identified in a company's books as accounts payable, commonly referred to as "payables."
Employees might not think of themselves as floating their employers a loan, but in effect, that's what they're doing. If they get paid every two weeks, then the company regularly enjoys two weeks of their valuable labor without having to pay for it. Their wages are of course building up, or "accruing," and the company will pay them in due time. But until it does, the workers are helping finance the company. And it's not just them. The company is also continuously running up bills for utilities, taxes and other common expenses. Accrued expenses represent value the company has received but not yet paid for, just like inventory obtained on trade credit. And as the company hires more (or fewer) people or uses more (or less) electricity, these accruals will adjust automatically, or "spontaneously."
It's a fact of business life that some companies will try to improve their cash-flow situation by holding on to spontaneous financing -- in other words, by delaying paying their bills. Companies that pay invoices within 30 days, for example, may move to a 45- or 60-day payment cycle, or longer. The longer a firm goes without paying a bill, the longer it gets to use someone else's money to finance its operations. But while doing this may produce short-term benefit, it can lead to long-term harm. As described by "CPA Practice Advisor" magazine, vendors, such as suppliers and contractors, can be alienated or driven away by such heavy-handedness -- or even driven out of business. Vendors may also react to the disruption in their own cash flow by raising their prices -- and maintaining those increases even if payment terms return to normal.
- Small Business Management: Launching and Growing Entrepreneurial Ventures; Justin Longenecker, et al
- Foundations of Finance: The Logic and Practice of Financial Management; Arthur Keown, et al
- Entrepreneur: Trade Credit
- AccountingCoach: What Are Accrued Expenses, and When Are They Recorded?
- CPA Practice Advisor: Why Extending Payables Is a Really Bad idea
Definition of Sources for Finance
Spontaneous Sources of Finance. Definition of Sources for Finance. A company often needs external financing to operate in the short term and...
Sources of Finance for International Trade
Spontaneous Sources of Finance. A spontaneous source of finance refers to funds generated through a variety of normal business transactions.
How to Select Sources of Finance for Business
An example of debt financing includes loans. Equity financing consists of obtaining capital in exchange for a share of your company. ......
Sources of Financial Information
You May Also Like. Spontaneous Sources of Finance. A spontaneous source of finance refers to funds generated through a variety of normal...
The Advantages of Short Term Sources of Finance
Short term financing allows you to take advantage of sudden opportunities to make additional revenues or capture business ahead of your ......
List of Different Sources for Short-Term Business Financing
List of Different Sources for Short-Term Business Financing. Running a business can be a challenging enterprise. ... Spontaneous Sources of Finance.
Types of Sources of Finance
For example, a private finance source ... A spontaneous source of finance refers to funds generated through a variety of normal business...
Sources of Finance for Limited Companies
Spontaneous Sources of Finance; Advantages & Disadvantages of Different Sources of Finance; Print this article; ... working capital needs, ...
What Is Multilateral Financing?
The biggest example of multilateral financing is the international monetary fund. ... Spontaneous Sources of Finance. The Disadvantages of External Sources of...