Thursday, March 8, 2012

Short term finance

Short term finance:

Short term finance usually refers to funds required for a period of less then 1 (one) year. It consists of
obligations of business that are expected to mature in one or less period time. Short term finance is needed to
meet variable and temporary working capital requirements or to finance the current assets need of the fund.
Short term finance could be two types:

1. Unsecured sources of short term finance.
2. Secured sources of short term finance.

1. Unsecured sources of short term finance: Unsecured sources of short term finance is consists of
funds raise by the firm without pledging any asset as collateral. Unsecured source of short term finance may
be three way. Such as,
• Spontaneous
• Banks
• Non banks
• Money market credit

Which raises automatically during the course of conducting the business. It has two subdivisions:
Account payables or trade credit and Accruals or accrued

Account payables or trade credit:                                                                                                                                          Accounts payables are created by a firm/business/company through
purchase of raw materials and other goods on “Open Account” or credit. No formal security is given for
such purchase, rather both parties signing a “Credit term”.
Accruals or accrued (arising from wage and tax A/C:
                        Accruals or accrued expenses represent these items
that have already incurred but not yet paid. Wages or Tax dues are the examples of such sources. Such
sources of financing are costless to a fund.

This source of financing is called negotiated unsecured finance from the banks. Which are
following types:-
• Notes
• Line of credit
• Revolving credit

Notes: A single payment loan given by a bank to a credit worthy customer. This is also called one short deal.
Where any customer needs urgent additional funds for a vary short time may approaches to a bank and the
document against which the loan is given has to be signed by the customer is called notes.
Line of credit: It is an agreement between the bank and a business/ a customer which ensures the client to
provide short term unsecured loans to a borrower subject to availability of sufficient fund in the bank.
Normally there is a limit of credit mentioned in the agreement. The borrower can draw and deposit within
the limit for a specified period.
Revolving credit:
It is a granted Line of credit.
Money market credit: It may be two type of:
• Commercial paper
• Banks acceptance

Commercial paper: It is an unsecured short term source of finance. It’s also like short term bond and
maturity days will be 290 days. Blue chips company issue this type of commercial paper. Blue chips
company is famous company which have large price of their product also popularity of products.
Banks acceptance: When commercial paper issued by banks then its called banks acceptance.

2. Secured sources of short-term finance:
Normally there are three sources:
a) Bills/Accounts receivables
b) Use of Inventory

a) Bills/Accounts receivables: Two commonly used means of obtaining short-term financing with accounts
receivables are pledging accounts receivable and factoring accounts/bills receivable.
A pledge of accounts receivable is often used to secure a short-term finance. Because accounts
receivable are normally quite liquid, they are an attractive form of short-term loan collateral.
Discounting/selling the bills to some of financing institutes is called financing by factoring
accounts/bills receivable. Factoring is exercise by some specialized financial institutes or banks. Factoring
means buy the bills at discounted rate and receiving the full proceeds by the factoring issues of maturity.
b) Use of inventory: Inventory has three materials:
• Raw materials
• Working capitals
• Finish goods

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