Chapter 3 -Continued ( Short Term sources of Finance )

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 It is a running account from which the amount can be withdrawn and paid back as per the needs of the customer.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c.       Interest is charged only on the actual amount withdrawn.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.

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.