Finance is the life-blood of business. The business cannot run efficiently if it does not have adequate finance to meet its requirements. The financial requirements of business can be classified into two categories:
I. Short-term financial requirements, and
II. Long-tem financial requirements.
Short-term funds are required for meeting working capital needs. They are usually required for a period up to one year. They are raised from sources which can provide funds only for a short period quickly and at reasonable cost. The requirement of these funds is usually met by taking short-term loans or getting the bill discounted from the commercial banks.
Sources of Short-term Finance
There are a number of sources of short-term finance which are listed below:
1. Trade credit
2. Bank credit
â€“ Loans and advances
â€“ Cash credit
â€“ Discounting of bills
3. Customersâ€™ advances
4. Installment credit
5. Loans from co-operatives
A firm may meet its financial requirements by taking both short-term loans/credits and long-term loans.
Short term loans / credits
The short- term loans/ credits are obtained for working capital requirements. The following are the important sources of Short- term loans/credit
Trade credit is a form of short-term financing common to almost all types of business firms. Trade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. Usually 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 does not make the funds available in cash but it facilitates purchases without making immediate payment.
This is quite a popular source of finance. As a matter of facts, it is the largest sources of short- term funds. In an advanced economy, most buyers are not required to pay for goods on delivery. They are allowed a short- term credit period before payment is due. This credit may take the form (a) An Open Account Credit Arrangement, and (b) Acceptance Credit Arrangement.
In the case of an Open Account Credit Arrangement, the buyer does not sign a formal debt instrument as an evidence of the amount due by him to the seller. While in case of an Acceptance Credit Arrangement, the buyer accepts a bill of exchange or gives a promissory note for the amount due by him to the seller. Thus, it is an arrangement by which the indebtedness of the buyer is recognized formally.
Trade Credit Arrangement is generally made available to the buyer on an informal basis without creating any charge on assets. Trade Credit Arrangements usually carry Stipulation of allowing a cash discount to the buyer for prompt payments. The volume of trade credit and its popularity as a means of short â€“term financing depends on the following factors:
1. The terms of trade credit
2. Reputation of the purchasing firms
3. Financial position of the seller
4. Volume of purchases to be made by the buyer.
Merits of Trade Credit
1. The major merit of trade credit as a source of finance is its ready availability.
2. Trade Credit is available on a continuing and informal basis. There is no need to arrange financing formally. In case , the firm is now taking cash discounts, additional credit is readily available by not paying existing trade creditors till the expiry of the credit period. There is no need to...