What is Short Term Financing

Needs for a small period normally less than a year is known as Short term finance. It is also known as working capital financing. Due to uneven flow of cash into business or the seasonal pattern of business etc leads to requirement of short term finance.

One business get establishment, funds are required to meet its day to day expenses. Like raw materials must be purchased at regular intervals, workers must be paid wages regularly, water and power charges have to be paid regularly. To meet these expenses there is need of liquid cash, for financing such requirements short-term funds are needed. Inadequacy of short-term funds may even lead to closure of business.

Short Term Sources Of Finance:

1. Trade Credit

Credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. In general business enterprises buy supplies on a 30 to 90 days credit, this means that the goods are delivered but payments are not made until the expiry of period of credit. This type of credit facilitates purchases without making immediate payment. This is quite a popular source of finance.

2. Bank Credit

• Bank credit is short term loan which is provided by bank to business entity. Under this scheme credit is granted, the borrower gets a right to draw the amount of credit at one time or in instalments as and when needed. Bank credit may be granted by way of loans, cash credit, overdraft and discounted bills.

1. Loan

When a particular amount is advance by bank which is repayable after certain time period i known as bank loan.

2. Cash Credit

An arrangement whereby banks allow the borrower to withdraw money upto a specified limit, this limit is known as cash credit limit.

3. Over Draft

When a depositor withdraw money in excess of the balance in his account upto a specified limit, provided by bank is known as overdraft facility.

4. Discounting of bills

When bank advances money by discounting bills of exchange, promissory notes and hundies. These documents are presented before the bank for discounting, banks credit the amount to costomer’s account after deducting discount.

3. Customers’ Advances

Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers’ advance represents a part of the payment towards price on the product (s) which will be delivered at a later date

4. Instalment credit

Under this type scheme only small amount of money is paid at the time of delivery of article and rest of amount is fixed on instalment. Now a days it is becoming more popular source of financing for consumer goods like television, refrigerator as well as industrial goods.

Financing Are Categorised on Fund Based Financing and Non-Fund Based Financing

Fund Based Financing

Financial service involves credit offered by banks in the form of loans, overdrafts and other cash transactions.

Non-Fund Based financing:

In a non-fund based financial service the bank does not deal with funds or cash transactions. Some examples of this type of service are bonds, letters of guarantee and letters of credit.

In today’s scenario there are plethora of options are available for SMEs to get finance from various financial institutions. It is most important to choose your financial institution carefully, so that your business gets finance at low interest.

Of all choices available you usually get stuck between a bank or NBFC.

NBFC is a financial institution which provides financial service without holding banking license. NBFC are registered under companies act and regulated by RBI.

While a bank is a financial institution that accepts deposits from the public and creates credit. Banks can perform lending activities either directly or indirectly through capital markets.

The functions of NBFCs are limited to the extent that they can accept/renew public deposits for a minimum period of 1 year to 5 years. The maximum interest rate an NBFC can offer is 12.5%. Also, keep in mind that the RBI doesn’t guarantee the repayment of deposits by NBFCs, unlike banks. Since NBFCs doesn’t form a part of the payment and settlement system, it cannot issue a cheque to its customers.