Short-term finance, or working capital financing, is typically for needs lasting less than a year, often due to cash flow inconsistencies or seasonal operations. Various sources include trade credit, bank advances, commercial papers, and factoring, each with specific terms and features. These financing options are crucial for managing current assets and ensuring business liquidity.

1. Short Term Sources of Finance
Prepared by
Dr Santosh Solanki
LNCT-MBA

2. Meaning
• 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.

3. Financial needs of the organization:-
1) Long term – for a period of 5 to 10 years.
For acquiring fixed assets
2) Medium term – 1 to 5 years.
Expenditure for publicity
3) Short term – 0 to 1 year. Known as
working capital requirements.
Investments in current assets like stock,
debtors etc

4. Short term sources of fund
ØTrade credit
ØCommercial banks
ØFixed deposits for a period of one year
ØAdvance received from customers
ØVarious short term provisions

5. Trade credit
• Credit granted by the suppliers of goods
for a period of 15 to 90 days.
• It is one of the good source of fund
because there is no extra cost up to the
period.

6. Commercial banks
• Bank advance meant for not only for
earning profit but also for socio-
economic development.
• Banks usually, advances granted on the
share security of some tangible assets
like gold, etc.

7. Forms of bank advances
• Loans – entire advance is disbursed as the
transfer of current account of the borrower on
the basis of security.
• Overdraft – facility to withdraw excess of
credit balance in their current a/c.
• Clean overdraft – based on the personal
security
• Cash credit – same as loan except interest is
paid on used amount

8. Intercorporate deposits
• Companies can borrow funds from another co.
who have surplus fund for a period of six
months.
• Interest depend upon the amount and time
period.

9. Certificate of deposits - CD
• A certificate of deposit is a document of
title to a term deposit
• There is prescribed rate on such fund.
• Issuer is not required to encash before
the maturity date. But it is freely
transferable.

10. Features of Certificate Deposit
• It can be issued by banks and financial institutions
• Denomination is rupees one lac o multiplications.
• Maturity period is 7 days to one year
• Genarally issued at discount
• It is freely transferable
• It is issued in demat form.

11. Public deposits
• A co. can accept deposits from public
maximum upon 35% of its paid up capital
and reserve.
• Period is 6 months to 3 years

12. Commercial Paper - CP
• CP was introduced in india in 1990.
• It is an unsecured promissory note issued
by the co. who is financially sound and a
listed co. for a period of 91 to 180 days.
• It is generally issued at discount

13. Features of Commercial Paper
• The tangible net worth of issuing co.
should be less than rupees four crore
• It is usually issued in multiples of Rs.5 lac.
• It is in the form of unsecured promissory
note
• Minimum credit rating is required from
CRISIL
• Its maturity is less than one year

14. Factoring
• It is a financial service rendered by a
factor wherein a business organization
sells its accounts receivables to a
factoring firm and gets cash from the
factor, and the factor assumes
responsibility of collecting dues from the
concerned parties.

15. Types of factoring
• Recourse factoring – any loss of bad debts will
be borne by the business firm.
• Non-recourse factoring – loss of bad debt will
be met by factor.
• Domestic factoring – if factoring is for
domestic sales
• Export factoring – if factor’s bank is situated in
exporter’s country.

16. Thanks