30-04-2014, 04:10 PM
Sources of Short-term Finance
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Introduction
In the previous lesson you have learnt about the various types of financial
needs. The need for 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. Some sources like issue
of shares and debentures provide money for a longer period. These are
therefore, known as sources of long-term finance. On the other hand
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. In this lesson you will study about the various sources
of short-term finance and their relative merits and demerits.
Purpose of Short-term Finance
After establishment of a business, funds are required to meet its day to
day expenses. For example raw materials must be purchased at regular
intervals, workers must be paid wages regularly, water and power charges
have to be paid regularly. Thus there is a continuous necessity of liquid
cash to be available for meeting these expenses. For financing such
requirements short-term funds are needed. The availability of short-term
funds is essential. Inadequacy of short-term funds may even lead to closure
of business.
Trade Credit
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.
Bank Credit
Commercial banks grant short-term finance to business firms which is
known as bank credit. When bank 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.
Loans from Co-operative Banks
Co-operative banks are a good source to procure short-term
finance. Such banks have been established at local, district and
state levels. District Cooperative Banks are the federation of
primary credit societies. The State Cooperative Bank finances and
controls the District Cooperative Banks in the state. They are also
governed by Reserve Bank of India regulations. Some of these
banks like the Vaish Co-operative Bank was initially established as
a co-operative society and later converted into a bank. These banks
grant loans for personal as well as business purposes. Membership
is the primary condition for securing loan. The functions of these
banks are largely comparable to the functions of commercial banks.