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SHORT TERM SOURCES OF FUNDS
The document outlines various short-term sources of funds essential for business operations, including trade credit, bank credit, customer advances, and public deposits. These financial resources are critical for managing day-to-day operations, covering working capital needs, and supporting increased production. It emphasizes the importance of understanding different funding options and their classifications based on time period and accessibility.
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SHORT TERM SOURCES OF FUNDS
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- 2. FINANCIALMANAGEMENTJithinOmanakuttan INTRODUCTION • The needfor finance may be for long-term, medium-term or for short-term. • Financial requirements with regard to fixed and working capital vary from one organisation to other. • To meet out these requirements, funds need to be raised from various sources. • Sources like trade credit, cash credit, overdraft, bank loan etc. which make money available for a shorter period of time are called sources of short-term finance.
- 3. FINANCIALMANAGEMENTJithinOmanakuttan SOURCES OF FUNDS •Business simply cannot function without money, and the money required to make a business function is known as business funds. • Throughout the life of business, money is required continuously. • Sources of funds are used in activities of the business. • They are classified based on time period, ownership and control, and their source of generation.
- 4. FINANCIALMANAGEMENTJithinOmanakuttan SOURCES OF FUNDS •Based on time period sources of funds are classified into 3. Based On Time Period Long Term Medium Term Short Term
- 5. FINANCIALMANAGEMENTJithinOmanakuttan SHORT TERM FINANCE- PURPOSES • Meeting day to day financial requirements. • Enables firms to hold stock of raw materials and finished product. • Goods can be sold on credit. • More essential when, it is necessary to increase the volume of production at a short notice. • Required to allow flow of cash during the operating cycle.
- 6. FINANCIALMANAGEMENTJithinOmanakuttan SHORT-TERM SOURCES OFFUNDS • Trade credit • Bank credit • Customer’s Advances • Instalment credit • Loans from co-operatives • Indigenous bankers • Factoring • Accrued expenses • Differed incomes • Commercial papers • Letter of credit • Public deposits
- 7. FINANCIALMANAGEMENTJithinOmanakuttan 1. Trade Credit •Suppliers are often amenable to working with their best customers when they need to fund a large order to ramp up a new contract or bridge a short-term need for additional capital by extending payment terms. • If we have greater relationship with the supplier or vendors, it’s possible to negotiate payment terms to accommodate the seasonality of your business.
- 8. FINANCIALMANAGEMENTJithinOmanakuttan 2. Bank Credit •Bank credit includes; Bank Credit Cash Credit Overdraft Purchasing and Discounting of Bills Loans and Advances(a) (b) (c) (d)
- 9. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (a) Loans andadvances :- • A certain amount is advanced by a bank repayable after a specified period. • Credited to a separate loan account and the borrower has to pay interest on the whole amount. • Usually loans are granted against security of assets.
- 10. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (b) Cash Credit:- • An arrangement whereby, banks allow the borrower to withdraw money up to a specified limit. • Limit is granted for one year (can be extended after review for another year). • If the borrower still desires to continue the limit, it must be renewed after three years. • Rate of interest varies depending upon the amount of limit. • Banks ask for collateral security. • Interest is charged only on the amount actually withdrawn and not on the amount of entire limit.
- 11. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (c) Overdraft :- •An agreement with a bank by which a current account-holder is allowed to withdraw more than the balance to his credit up to a certain limit. • No restrictions for limit. • Interest is charged on daily overdrawn balances. • Overdraft is allowed for a short period (temporary accommodation). • Cash credit is allowed for a longer period.
- 12. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (d) Purchasing andDiscounting of Bills :- • The most important forum in which a bank lends without any collateral security. • The bank purchases the bills payable on demand and credits the customer’s account with the amount of bills less discount. At the maturity of the bills, bank presents the bill to its acceptor for payment. • In case the bill discounted is dishonoured by non-payment, the bank recovers the full amount of the bill from the customer along with expenses in that connection.
- 13. FINANCIALMANAGEMENTJithinOmanakuttan 3. Customer’s Advances •Advances from customers and agents against orders. • Cheap source of finance. • In order to minimise their investment in working capital, some firms having long production cycle, especially the firms manufacturing industrial products prefer to take advance from their customers.
- 14. FINANCIALMANAGEMENTJithinOmanakuttan 4. Instalment Credit •Assets are purchased and the possession of goods is taken immediately but the payment is made in instalment over a pre- determined period of time. • Interest is charged on the unpaid price or it may be adjusted in the price. • Used as a source of short-term working capital by many business houses which have difficult funds position.
- 15. FINANCIALMANAGEMENTJithinOmanakuttan 5. Loans fromCo-operatives • Loan facility available through Co-operative banks. • District Cooperative Banks are the federation of primary credit societies. • Bank activities are governed by RBI. • Grant loans for personal as well as business purposes. • Membership is the primary condition for securing loan. • Functions of these banks are largely comparable to the functions of commercial banks.
- 16. FINANCIALMANAGEMENTJithinOmanakuttan 6. Indigenous Bankers •Loan facility through Commercial banks. • Private money lenders and other Country Bankers lost their monopoly. • Today some business houses have to depend upon indigenous bankers for obtaining loans to meet their working capital requirements.
- 17. FINANCIALMANAGEMENTJithinOmanakuttan 7. Factoring • Raisingshort-term finance is through account receivable credit offered by commercial banks and factors. • A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales. • Factors render services varying from bill discounting facilities offered by commercial banks to a total take-over of administration of credit sales. • Factoring may be on a recourse basis, where the risk of bad debts is borne by the client, or on a non-recourse basis, where the risk of credit is borne by the factor. • Factoring in India is rendered by only a few financial institutions on a recourse basis.
- 18. FINANCIALMANAGEMENTJithinOmanakuttan 8. Accrued Expenses •Such as accrued wages, taxes, and interest-represent liabilities for services rendered to the firm that have not yet been paid for by the firm. As such, they constitute an interest-free source of financing. • The longer the payment- period of accrued wages , the greater is the amount liability towards employees or the funds provided by them. • Taxes are paid after collection and in the intervening period serve as a good source of finance. • Interest is also paid periodically while the funds are used continuously by a firm. • Accruals varies with the change in the level of activity of a firm.
- 19. FINANCIALMANAGEMENTJithinOmanakuttan 9. Differed Incomes •Incomes received in advance before supplying goods or services. • Represent funds received by a firm for which it has to supply goods or services in future. • Funds increase the liquidity of a firm. • Firms having great demand for its products and services, and those having good reputation in the market can demand deferred incomes.
- 20. FINANCIALMANAGEMENTJithinOmanakuttan 10. Commercial Papers •A third source of short-term credit, consists of well- established firms' promissory notes sold primarily to other businesses, insurance companies, pension funds, and banks. • Issued for periods varying from two to six months. • An important money market instrument in advanced countries like U.S.A. • In India, the RBI introduced commercial paper in the Indian money market on the recommendations of the Working Group on Money Market (Vaghul Committee).
- 21. FINANCIALMANAGEMENTJithinOmanakuttan Contd. • Only largecompanies enjoying high credit rating and sound financial health can issue commercial paper ( satisfying eligibility conditions by RBI). • Cheaper source of raising short-term finance. • It cannot be redeemed before the maturity date even if the issuing firm has surplus funds to pay back.
- 22. FINANCIALMANAGEMENTJithinOmanakuttan 11. Letter ofCredit • Popularly known as L/C. • An undertaking by a bank to honour the obligation of its customer up to a specified amount, should the customer fail to do so. • It ensures that there is no risk of non-payment. • Simply a guarantee by the bank to the suppliers that their bills up to a specified amount would be honoured.
- 23. FINANCIALMANAGEMENTJithinOmanakuttan Contd. • L/C maybe of many types. L/C Documentary Revocable Irrevocable Revolving Fixed Clean(a) (b) (c) (d) (e) (f)
- 24. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (a)Clean L/C :- •It is a guarantee for the acceptance and payment of bills without any conditions. (b) Documentary L/C :- • It requires that the exporter’s bill of exchange be accompanied by certain documents evidencing title to the goods. (c) Revocable L/C :- • It is one which can be withdrawn by the issuing bank without the prior consent of the exporter.
- 25. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (d) Irrevocable L/C:- • It cannot be withdrawn without the consent of the beneficiary. (e) Revolving L/C :- • The amount of credit is automatically reversed to the original amount after such an amount has once been paid as per defined conditions of the business transaction. • There is no deed for further application for another letter of credit to be issued provided the conditions specified in the first credit are fulfilled.
- 26. FINANCIALMANAGEMENTJithinOmanakuttan Contd. (f) Fixed L/C:- • It fixes the amount of financial obligation of the issuing bank either in one bill or in several bills put together.
- 27. FINANCIALMANAGEMENTJithinOmanakuttan 12. Public Deposits •The unsecured deposits invited by companies from the public mainly to finance working capital needs. • A company wishing to invite public deposits makes an advertisement in the newspapers. • It is raised directly from the public. • This source has become very popular off late because companies offer higher interest than the interest offered by banks. • A company can accept deposits from the public to finance its medium- and short-term requirements of funds. • The acceptance of public deposits is regulated by the RBI.
- 28. FINANCIALMANAGEMENTJithinOmanakuttan CONCLUSION • Funding isthe act of providing financial resources, usually in the form of money, or other values such as effort or time, to finance a need, program, and project, usually by an organisation or company. • Based on time period sources of funds are classified into long term, medium term and short term. • ST sources of fund essentially help business owners cover the costs of growing their business. • There are many types of short term sources of funds; trade credit, cash credit, letter of credit, loans, deposits etc.
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