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. The uneven flow of cash into business or the seasonal pattern of business etc leads to the requirement of short-term finance.
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Short-Term Sources Of Finance:
Credit granted to manufacturers and traders by the suppliers of raw materials 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 the period of credit. This type of credit facilitates purchases without making immediate payments. This is quite a popular source of finance.
- 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.
When a particular amount is advanced by the bank which is repayable after a certain time period i known as bank loan.
- Cash Credit
An arrangement whereby banks allow the borrower to withdraw money upto a specified limit, this limit is known as cash credit limit.
- Over Draft
When a depositor withdraws money in excess of the balance in his account upto a specified limit, provided by bank is known as an overdraft facility.
- Discounting of bills
When a bank advances money by discounting bills of exchange, promissory notes and undies. These documents are presented before the bank for discounting, banks credit the amount to customer’s account after deducting the discount.
- 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
- Instalment credit
Under this type of scheme only a small amount of money is paid at the time of delivery of the article and the rest of the amount is fixed on instalments. Nowadays it is becoming a 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 a plethora of options 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 that provides financial services without holding a banking license. NBFCs are registered under the 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 don’t form a part of the payment and settlement system, it cannot issue a cheque to its customers.
|Interest||Bank loans are typically linked to the MCLR, the minimum interest rate below which a bank is not permitted to lend.||NBFCs offer loans based on the prime lending rate (PLR) which is not regulated by RBI.NBFCs get an edge over banks who can’t lend below MCLR slab|
|Loan eligibility||Banks don’t fund the entire credit requirement and fund only a certain portion and the rest has to be paid by the borrower.||Since it is not regulated as tightly as banks, NBFCs can sanction amount higher than banks.|
|Paperwork||banks can be stringent when it comes to approval of the documents, it indulges more paper work and long approval process||Less documentation and paperwork|
|Credit Score||Bank provide loan or finance to those who have good credit score||NBFCs may offer and accept SME business loan even if the credit score is not too good.|
This portion of the site is for informational purposes only. The content is not legal advice. The statements and opinions are the expression of author, not corpseed, and have not been evaluated by corpseed for accuracy, completeness, or changes in the law.
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