Short-term Sources of Finance

 Trade Credit
 Accrued Expenses and Deferred Income
 Bank Borrowings
 Factoring of receivables
 Commercial Paper
 Trade Credit and Credit Terms
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 Refers to the credit that the customer gets from

supplier of goods in normal course of business.
 An informal arrangement, granted on an open
account basis, not formally acknowledge as a
debt.
 Trade credit may also take the form of bills
payable.
 Credit Terms refers to the conditions of due
date and cash discount.
 Benefits and Costs of Trade Credit
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 Benefits
1. Easy Availability. Suppliers sometimes offer cash discount to
2. Flexibility. buyers for making prompt payment. Buyer
should calculate the cost of foregoing cash
3. Informality. discount to decide whether or not cash
discount should be availed. The following
formula can be used:
 Costs
1. Implicit Cost.
2. Stretching A/P can prove to be very costly.
 Cost of cash discount
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 ACCRUED EXPENSES AND DEFERRED INCOME
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 Accrued Expenses
 Accrued expenses represent a liability that a firm has to
pay for the services which it has already received.
1. Accrued Wages and Salaries.
2. Accrued taxes and Interest.
 Deferred Income
 Deferred income represents funds received by the firm for
goods and services which it has agreed to supply in future.
1. Advance Payments.
 Bank Finance for Working Capital
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 Overdraft
 Cash Credit
 Purchase or Discounting of Bills
 Letter of Credit
 Working Capital Loan
 COMMERCIAL PAPER

 Unsecured promissory notes issued by firms to

raise short-term funds.
 In India, it was introduced in 1989 on
recommendation of the “Vaghul Working Group”.
 Commercial papers sell at a discount from face
value.
 Merits
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1. It is an alternative source of raising short-term

finance.
2. It is a cheaper source of finance in comparison to
the bank credit.
3. From an investor’s point of view, it provides an
opportunity to make a safe, short-term investment
of surplus funds.
 Demerits
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1. It is an impersonal method of financing.

2. A firm facing temporary liquidity problems may not
be able to raise funds by issuing new paper.
3. The amount of loanable funds available in the
commercial paper market is limited to the amount
of excess liquidity of the various purchasers of
commercial paper.
4. It cannot be redeemed until maturity.