Give any one source of short term financial needs.Give any one source of short term financial needs.
Answers
Short term finance refers to financing needs for a small period normally less than a year. In businesses, it is also known as working capital financing. This type of financing is normally needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory, accounts receivables etc. At times, only specific one time orders of a business are financed.
Sources of short term financial needs are as follows:-
TRADE CREDIT
It is the credit extended by the accounts payables. We would classify this credit into 2 types – free trade credit and paid trade credit. After a particular no. of days as per payment terms, the supplier charges interest on the delay of payment. So, the period before this is free trade credit and after that is paid trade credit.
It’s quite obvious that the free trade credit should be as much as possible because it is free of cost. How much is free trade credit extended to a customer? It depends upon the creditworthiness of the buyer, discipline maintained in payment commitments, the bulk of the business, etc. Higher you rate on these factors, higher would be the free trade credit available to your business.
Paid trade credit is definitely a type of short-term financing but on the priority list, it would be quite below. In short, it should be selected only when another financing is not available. The reason for not opting for it is its high-interest cost.
SHORT-TERM / WORKING CAPITAL LOANS
Short term loans can be availed from banks and other financial institutions. Banks extend these loans after careful study of the business, its working capital cycle, past track record etc. Once availed, these loans are repaid either in small installments or may be paid in full at the end of the period. This depends on the terms of the loan. It is advisable to use these loans for financing permanent working capital needs. There are other alternatives to fund the temporary working capital needs. For more refer Working Capital Loans.