What are the sources of short term finance?
Businesses often need short term financing when they are experiencing cash flow problems. This can happen even to businesses that are quite sound. There are a number of sources where short term financing can be obtained. Some examples of this include:
- Arranging for an overdraft from a bank. This can allow a business to write checks for more than they have in their account at a given time.
- Trade credits -- this is, in effect, a free loan in which the buyer is given a certain amount of time to pay for a shipment of goods.
- Bank loans. Depending on how solid the business is, the terms of these loans can vary.
There are a number of sources of financing available to businesses facing a short-term cash crunch or requiring an infusion of cash to finance an unforeseen development. The most obvious such source of funds would be the banking system. Banks make money by charging interest on loans to businesses and to individuals. Assuming the business in question has an otherwise solid financial foundation, a short- or long-term loan would be a routine measure from both its and the bank's perspective.
Another source of funds would be what is called an overdraft agreement, which is the bank's authorization to the business to essentially write checks in excess of the amount of money the business has in the bank. Basically, it is the bank's consent to bounce checks with the assurance that the bank will honor the draft. Other sources of funds include whatever savings the business has accumulated for recapitalization of a production line, for issuance of dividends to stockholders in the case of publicly held corporations, or for whatever other reason a corporate savings account may be maintained. Funds can be attained through arrangements with customers to pay in advance for yet-to-be delivered products or through the issuance of a form of bond. Cash can also be found through loans from its owner to itself (in other words, the owner of the business dips into his or her private savings to transfer money to the business).
Short term finance in business usually refers to the additional money a business requires for doing its business for short terms, which is usually a maximum period of one year. Some main sources of short term finance are bank overdrafts,trade credit, factoring, credit card, lease and bank loans.
Overdraft is a facility that bank provides to its customers in which the customer is permitted to draw money from banks in excess of the balance in heir bank accounts. In overdraft facility the bank specifies the maximum amount of debit balance in the account that is permitted. This limit is sometimes referred as bank limit.
Trade credit refers to purchasing goods and services a business need in the course of its business on credit. Depending on the trade practices prevalent in an industry, the credit worthiness of the company, and nature of business relationship between company and its suppliers a company may be allowed different time periods to pay for the goods and services they buy from different suppliers.
Just as companies get credit from their suppliers, they also need to give credit to their customers. Factoring refers to a system of selling the accounts receivable to specialist finance firms, who for a fee, pay the amount due to the company upfront, and collect it from debtors as and when due.
Credit card is a facility similar to trade credit, in which the the buyer pays the credit card company which in turn pays the supplier. The credit card are generally not issued to companies bu to the individual employees or owners of the small businesses, who may then use this facility to pay for business expenses such as travel.
Strictly speaking lease is not a way of getting finance, but a way of managing business with less finance. IN this alternative a business leases some of he equipments required rather than purchase them outright.
Bank loans refer to term loans given by banks which need to be repaid in installment over a fixed period which may be a short term or long term period. Though called bank loans, these loans may be advanced by banks or other financial institution. Such loans are generally given for specific purposes such as for purchase of capital equipments.