Financial need for a small period of time 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.
Once the business gets established, 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.
Sources of short-term finance:
- Trade Credit
The 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.
- Bank Credit:
Bank credit is short term loan which is provided by bank to business entity. Under this scheme the credit is granted, the borrower gets a right to draw the amount of credit at one time or in installments as and when needed. Bank credit may be granted by way of loans, cash credit, overdraft and discounted bills.
Loan: When a particular amount is advance by bank which is repayable after certain time period is known as bank loan.
Cash Credit: An arrangement whereby banks allow the borrower to withdraw money up to 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 up to a specified limit, provided by bank is known as overdraft facility.
Discounting of bills: When a bank advances money by discounting bills of exchange, promissory notes. These documents are presented before the bank for discounting; banks credit the amount to customer’s account after deducting 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
- Installment credit
Under this type of scheme only small amount of money is paid at the time of delivery of article and rest of amount is fixed on installment. Now a days it is becoming more popular source of financing for consumer goods like television, refrigerator as well as industrial goods.