Sources of Short Term Finance
Short term business finance facilitates businesses and financiers to seize quick business opportunities that require transactions to be completed in short time. The highlight of this kind of finance is its prompt availability to the businessman. Here it is imperative to get the transaction conducted as quickly as possible. Short term business finance is appropriate for both new and existing businesses.
1. Public Deposits:
a) It refers to the deposits accepted
from the public on which a fixed rate of interest is paid. The rate of
interest is higher than rate of interest paid by banks on their deposits.
b) Only Public Companies and non-banking
companies are allowed to accept public
deposits. A private company is not allowed to accept deposits.
c) The time period of such deposits may
range from 6 months to 3 years.
d) Such deposits are unsecured and no
assets are required to be pledged.
Advantages :
learn from book
Disadvantages
: learn form book.
2. Commercial Banks:
Lending is an important function of commercial banks. Banks
provide finance to business enterprises in the following ways:
1. Loans and Advances: the key features are as follows:
a.
It is lump sum money advanced by way loan
to the borrower for which a bank opens a separate account in the name of the
borrower in which the amount is credited.
b.
Interest : the borrower
is required to pay interest on the whole amount from the date the loan was
sanctioned.
c.
Repayment: The loan may
be repaid either in instalments at regular interval or in one time at the
expiry of a fixed term of loan.
d.
Withdrawal: the borrower
can withdraw the whole of the amount or a part of it but interest is charged on
the whole amount of loan.
e.
Security: The loan may be secured or
unsecured. However in most cases the banks ask for sufficient security from the
borrower before sanctioning the loan.
2. Cash Credit: Its key features are as follows:
a.
Cash credit is a kind of agreement with the bank
under which a bank fixes a maximum limit up to which
the borrower can withdraw money. It is a running account from which the amount
can be withdrawn and paid back as per the needs of the customer.
b.
The limit is usually fixed based on the
reputation and security offered by the borrower.
c.
Interest is charged only
on the actual amount withdrawn.
The main advantage is flexibility in the use of money and the
convenience. The customer does not have to approach the bank again and again in
case of need of funds.
The disadvantage is the high rate of interest.
The disadvantage is the high rate of interest.
3. Bank Overdraft: Main
points are:
a.
Overdraft is facility of withdrawing/making
payment more than the balance in the bank.
b.
Overdraft facility is granted to customers
having a current account with the bank.
c.
A maximum limit of overdraft is fixed based
on the reputation ( credit worthiness) of the customer and the security offered
by him.
d.
Interest is charged on
the actual amount of overdraft.
This is a very convenient and
flexible one time form of short term financial arrangement with the bank and
the customer does not have to ask bank if the payment exceeds the balance in
the bank.
4. Discounting of
Bills: Main points are:
a.
Discounting of bills means getting cash from a
bank in exchange of Bills of exchange ,promissory note etc.
b.
Bank charge some commission/interest for this
service by paying amount lower than the face value of the bill. The charges are
for the unexpired time period of the bill. These are called discounting
charges.
c.
On maturity date of the bills, the bank will
collect full amount of the bill from the drawee ( debtor).
d.
The borrower/customer remains liable to the bank,
if the drawee fails to honour the bill on its due date.
