There are various types of short term sources of finance available in current market. Short term financing examples: Documentary Letter of Credit, Revocable Letter of Credit, Finance against Securities, Fixed Letter of Credit, Purchasing and Discounting of Bills and more. There are some of the sources of short term financing which you might not be aware of it. Here we have listed down Top 10 – Best Short Term Source of Finance for business available in financial market.
- 0.1 Top 10 – Short Term Sources of Finance / Short Term Financing:
- 0.2 1. Retail Banks:
- 0.3 2. Trade Credit:
- 0.4 3. Commercial Banks:
- 0.5 4. Commercial Paper:
- 0.6 5. Advances:
- 0.7 6. Public Deposits:
- 0.8 7. Installment Payment:
- 0.9 8. Bills Discounting:
- 0.10 9. Accrued Expenses:
- 0.11 10. Deferred Incomes:
- 0.12 Conclusion:
- 1 Basic Finance Concepts For Beginners Guide
Top 10 – Short Term Sources of Finance / Short Term Financing:
Let us further deep dive into purpose of short term sources of finance for business to understand in more about short term financing in detail.
1. Retail Banks:
Raising short term sources of finance from private investors, financial institutes or international banks used to be the only sources to finance before establishment of retail banking. Main disadvantage of it was that they had high rate of interest. Now with growing numbers of retail banks they’ve lost their monopoly control. This is one of the greatest advantages for a business for obtaining financing to satisfy their working-capital needs.
2. Trade Credit:
Trade credit means credit provided towards manufactures and also traders by suppliers of equipment, raw material, etc. Mainly businesses buy those items on a 30, 60 to 90 days credit. This means that will goods is delivered still payments is perhaps not made until trade credit period. This kind of credit doesn’t increases the finance for a business but it facilitates to buys without paying immediately for those goods. That is rather a best short term sources of finance for your business.
3. Commercial Banks:
Commercial banks grant short-term finance to businesses which is actually known as bank financing. Anytime business can get bank credits, all debtors get a right to draw your total amount of financing at one time otherwise at installments when required. Commercial banking institutions tend to be the absolute most significant purpose of short term sources of finance. They provide the wide variety of loans tailored to meet your specifications. For example:
- Letter of Credit.
- Loans Like: Mortgage Loans, Pledge Loans.
- Overdraft Facility.
- Bill Discounting.
4. Commercial Paper:
Commercial papers are unsecured promissory notes mostly issued by large companies to raise short term sources of finance. It’s a crucial money markets instrument in many countries just like India, America, Europe, China, etc. Commercial papers have maturity time period mainly ranging from 90 to 180 days. It is offered at a discounted price from the face value and then it can be redeemed at face value at maturity. Commercial paper is actually bought by investors, banks, trusts, mutual funds, insurance firms, companies to invest excess money for a short period of time.
Some well-known Individuals and business can take advances from their agents, distributors, clients against goods purchased. These purpose of short term sources of finance is one of the cheapest way to raise finance for your business. Few businesses for example: manufacturing business have long production cycle, particularly those firms prefer to take advance after their clients and customers.
6. Public Deposits:
Manufacturing companies as well as non-banking financial institutes in a private sector also facilities fixed deposits through public deposits has become a unique function of Indian financial system. It has been more popular in the funding of cotton textile companies and in last few years many companies own accepted fixed deposits through the general public in order to finance requirement of working capital finance. Acceptance of public fixed deposits by each corporate sector, in a lot of matters, is discovering to encourage less priority sectors. The growth of public fixed deposits in companies has also been seen that diversion of people’s savings in non-banking sector.
7. Installment Payment:
This really is one other good short term sources of finance option which you can really think off. Here you buy assets and take possession of goods however the payment are made through easy installment payments for the specified time period and rate of interest. Again, this does not create funds for business but sometimes it is utilized as source of short term financing by plenty of business owners who runs shortage of funds.
8. Bills Discounting:
Another method of raising short-term source of finance is actually with account receivable financing and factors offered by banking institutions. A commercial or investment bank might provide finance to a business by discounting the bills or on invoices of customers. So, the organization gets immediate payment for the goods sold on trade credit. Presently in India or Asia there are only few financial banks and institutions who provide for a recourse basis. Central banks suggested that banking institutions should be encouraged to create bill discounting or factoring benefits to corporate entities for quick finance.
9. Accrued Expenses:
Accrued Expenses tend to be some sort of expenses which have been incurred but not yet paid. These only express a financial obligation a company need to pay for service received. For example: wages, salaries, taxes, etc. Wages and also salaries are compensated to monthly, fortnightly for the services received by employer. In the same manner, accrued interest income and taxes always constitute a short term financing. As an when company activities and tasks are expanded, accrual always increases. Further, no interest are payable upon accrued expenses, that expresses a free complimentary source of funding for your business.
10. Deferred Incomes:
Deferred incomes have always been incomes received ahead of time before supplying services or goods. They represent funds received simply by company as an advance payment for supply of goods or service on the future date. These types of funds boost the liquidity of the company and additionally important short term source of finance for a company. Companies having very good and reputed brands in its products and services into the market could demand deferred incomes.
The main goal towards purpose of short term financing is to mainly fund the working capital o a business and day to day operations of a company. This chapter would have given you good knowledge on various types of short term sources of finance. Hope you would have liked it. Do share you feedback in the comments section.
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Basic Finance Concepts For Beginners Guide
- Chapter 1: What is Finance with Examples?
- Chapter 2: What is International Finance?
- Chapter 3: Importance of Finance
- Chapter 4: Features of Finance
- Chapter 5: Source of Funds
- Chapter 6: Types of Capital
- Chapter 7: Types of Capital Market
- Chapter 8: Types of Investment
- Currently Reading: Short Term Sources of Finance
- Chapter 10: Long Term Sources of Finance
- Chapter 11: Finance Quiz – Finance Basics for Beginners
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