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Source of Short Term

Short Term Finance
 Borrowing or lending of funds for a short period of time.
 Usually one year or less in duration.
 Short term finance is secured for financing the current assets.
 Bank Overdraft
 Treasury bill(T-Bill)
 Trade Creditors
 Customers Advances
 Finance Companies
 Commercial Paper
 Certificate of Deposit
Bank Overdraft
 Overdraft is a temporary facility that bank provides to its customers in
which the customer is permitted to draw money from banks in excess of
the balance in their bank accounts.
 You are charged interest based on the amount overdrawn and the
length of time overdrawn.
 Advantages – Flexible,Quick
 Disadvantage – Cost,Recall
Customers Advances
 Customers often finance the seller through advance payment for
the goods.

 The prices of the goods to be purchased are paid in advance, i.e.
before the receipt of the goods.

Trade Creditors
 Trade creditors are probably the most important single source of
short term credit. Trade creditors are those business establishments
which sell good to others on credit. That is, they do not require
payment on the spot; rather they are to be paid after some days
from the date of sale.

 Credit granted to manufactures and traders by the suppliers of raw

 Usually for 30-90 days.
Treasury bill(T-Bill)
 Short Term Government Security
 They are promissory Notes issued at discount and for a fixed period
 Central\State Govt. (RBI)
 First issued in India in 1917
 Usually sold at auction on discount basis.
 Maturity 91- 364 days

 Sold to Public & Banks

 Risk is Low.

 Yield is lower than on other securities.

 Treasury Notes – Long term 1- 10 yrs.

Commercial Paper
 It is an Unsecured money market instrument issued in the form of a
promissory note.
 Introduced in India in 1990
 It was introduced in India with a view to enabling highly rated
corporate borrowers to diversify their sources of short term borrowing
and to provide an additional instrument to investors.
 Who can issue
Primary Dealers(PDs)
All India Financial Institutions

 Commercial papers are a form of short-term borrowing facility with
maturities from seven to 364 days.

 Companies can thus obtain unsecured finance directly from investors.
Bypassing banks and bond markets, although banks are often used as
agents to place the paper.

 Who can Invest
Indiviuals,banking companies, other corporate bodies

 Requirements
Credit Rating Serviice (CRISIL) minimum credit A-2

 Period of Maturity

 There is no collateral on the debt,Commerical paper is only an
option for large companies having high level credit rating from
recognised credit rating agency (S&P).

Commercial Banks
 The commercial banks of a country generally supply funds to the
business concerns on a short-term basis.

 Either with security or without security if the customer is financially

 The banks, collecting scattered savings of the people, invest a
portion of the deposits in the business for a short period of time.

Certificate of deposit (CD)
 Similar to savings account
 CD’s are a form of time deposit
 A certificate of Deposit is a relatively low risk debt instrument
purchased directly through a commercial bank of savings and loan
 CD indicates that the investors has deposited a sum of money for
specified rate of interest.
 CD’s are not publicly traded can purchase CD’s
through a stockbroker. Issued by Bank.
 Interest on CD’s not exempt from States and local taxes.
 You can look but can’t touch before maturity.
 Higher rates of return
 Money removed subject to penalty.
 3 Months – 7yrs
 Banks have to maintain appropriate reserve requirement (CRR)

Types of CD’s
 Traditional CD - receive fixed interest rate over a specific period of
time.(Half penalty)
 Bump-Up CD – Allows you to swap your CD’s interest rate for a
higher one if rates on new CD’s of similar duration rise during your
investment period.
 Liquid CD – Allows to withdraw part of your deposit without paying a
 Callable CD – Bank that issues this type can recall it after asset

Factors or Brokers
 In one basic respect, factoring is different from other forms of
financing. In other forms funds are granted to one individual largely
on the basis of his property. Factoring is based on a different

 In considering a company’s request for funds we are more
interested in the men behind the company their ability, their hopes
and aspirations for the future.

Miscellaneous Sources
 There are many more sources from which can secure funds for short
period. They are—friend and relatives, public deposits, loan from
officer and the company directors and foreign exchange banks