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Main Sources of Short-Term Finance

Short-term finance deals with raising money for periods ranging from a few days to one year. The main sources of short-term finance include trade credit extended by suppliers for 30-90 days without interest; consumer credit or customer advances provided by manufacturers for special orders; installment credit from equipment suppliers spread over time; accounts receivable financing where a company receives advances based on unpaid customer invoices; and bank credit in the form of loans.

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27 views2 pages

Main Sources of Short-Term Finance

Short-term finance deals with raising money for periods ranging from a few days to one year. The main sources of short-term finance include trade credit extended by suppliers for 30-90 days without interest; consumer credit or customer advances provided by manufacturers for special orders; installment credit from equipment suppliers spread over time; accounts receivable financing where a company receives advances based on unpaid customer invoices; and bank credit in the form of loans.

Uploaded by

raiza
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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What is Short-term Finance?

•Short-term financing deals with raising of money required for a shorter periods i.e.
periods varying from a few days to one year. There are, however, no rigid rules about the
term. It may sometimes exceed one year but still be called as short-term finance.

•The practice of almost all European banks is to regard short-term finance up to one
year. Thus, we can conclude that short-term finance may be for a very short period of
one to three months or for longer periods up to one year.

•All working capital except that part of it which is necessary for holding a minimum level
of raw materials, stores, finished goods in an industry, is short-term capital. It should be
noted that the requirements of regular or permanent working capital for the business
should be financed through sources of medium and long-term finance.

•Themainfeatureofshort-
termfinanceisthatitisraisedandpaidbackwithinashorterperiodoftime.

Main Sources of Short-term Finance


1.TradeCredit.

2.ConsumerCredit.

3.InstallmentCredit.

4.AccountReceivableFinancing.

5.BankCredit.

6.OtherSources.

1. Trade Credit
•Just as a firm grants credit to its customers it can also get credit from the
manufacturers or wholesalers or suppliers. It is known as trade or mercantile
credit.

According to Howard and Upton, trade credit may be defined as


•the credit extended by the seller to the buyers at all levels of production and
distribution processes down to the retailer.

•The usual duration of this credit ranges from 30 to 90 days. It is granted to the
company or firm on “Open account” without any security except that of the goodwill and
financial standing of the buyer.

•Trade credit does not make available the funds in cash but it facilitates the purchase of
supplies without immediate payment. No interest is generally payable on trade credits.
But the borrower cannot get any cash discount. The availability of the trade credit
depends upon the buyer’s need for it and also the willingness of the supplier.

The willingness of the supplier to extend credit is also depending upon the following
factors:
1.Thefinancialresourcesofthesupplier.

2.Hiseagernesstodisposeofhisstock.

3.Degreeofcompetitioninthemarket.

4.Creditworthinessofthefirm.

2. Consumer Credit or Customer Advance


•Many times the manufacturers or the suppliers insist on, advance by the customers
particularly in case of special orders or big orders. The customer advance forms part of
the price of the products ordered by him.

Some times, the customer also tenders the full price. This is an interest free source of
finance. The period of such credit depends upon the time taken to deliver the goods. The
availability of this credit also depends on the following factors:
•1.Competitiveconditionsinthemarket—Ifacutecompetitionprevails,the supplier can not
insist the buyer to pay an advance.

•2.Customsofthetradeandusage.

•3.Reputationofthesupplier.

3. Installment Credit
•This is also called consumer credit. Retailers for selling consumer durable generally use
it. Here, however, we use the term “Installment credit” to denote the facility provided by
the equipment suppliers on easy installments as this serves to provide capital to a firm
in kind.

•Installmentincludesinterestonunpaidsumsandissuitablyspreadsoastoenablethepurchasi
ngcompanytomeetthemoutofcurrentcashflows.

•Commercialbanksandfinancialinstitutions,now-a-
daysprovidethisformofcreditonliberalterms.Hirepurchasesystemisalsoamodifiedformoft
heinstallmentcredit.Inthehirepurchasesystem,thetitleoverthemachineryorequipmentre
mainswiththesupplieruntilthefullpriceamountissettled.

4. Accounts Receivable Financing


•Under this method ,a financing company purchases the account receivables
fromthecustomersormoneyisadvancedonthesecurityoftheaccountsreceivable.Inshort,itis
amethodofgettingcreditbypledgingbookdebts.

•In financial accounting ,it is denoted as Sundry Debtors or Trade Debtors, and this it
emappearson the assetsideoftheBalanceSheet.

•Since credit sales are unavoidable in trading transactions, every trader has always a
larger amount locked up in the form of Account Receivables. This account receivable is a
right to property and a right to collect the amount from the client. This method of
financing is very popular in the United States of America.
Reference: https://shorturl.gg/HKAB

5. Bank Credit
•The term bank credit refers to the amount of credit available to a business or individual from a
banking institution in the form of loans.

Reference: https://rb.gy/tvpykp

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