Short Term Finance

Financial need for a small period of time normally less than a year is known as Short term finance. It is also known as working capital financing. Due to uneven flow of cash into business or the seasonal pattern of business etc. leads to requirement of short-term finance.

Once the business gets established, funds are required to meet its day-to-day expenses. Like raw materials must be purchased at regular intervals, workers must be paid wages regularly, water and power charges have to be paid regularly. To meet these expenses there is a need of liquid cash, for financing such requirements short-term funds are needed. Inadequacy of short-term funds may even lead to closure of business.

Sources of short-term finance:

• Trade Credit:

The credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. In general business enterprises buy supplies on a 30 to 90 days credit, this means that the goods are delivered but payments are not made until the expiry of period of credit. This type of credit facilitates purchases without making immediate payment. This is quite a popular source of finance.

• Bank Credit:

Bank credit is short term loan which is provided by bank to business entity. Under this scheme the credit is granted, the borrower gets a right to draw the amount of credit at one time or in installments as and when needed. Bank credit may be granted by way of loans, cash credit, overdraft and discounted bills.

Loan: When a particular amount is advance by bank which is repayable after certain time period is known as bank loan.

Cash Credit: An arrangement whereby banks allow the borrower to withdraw money up to a specified limit, this limit is known as cash credit limit.

Over Draft: When a depositor withdraws money in excess of the balance in his account up to a specified limit, provided by bank is known as overdraft facility.

Discounting of bills: When a bank advances money by discounting bills of exchange, promissory notes. These documents are presented before the bank for discounting; banks credit the amount to customer’s account after deducting discount.

• Customers’ Advances:

Sometimes businessmen insist on their customers to make some advance payment. It is generally asked when the value of order is quite large or things ordered are very costly. Customers’ advance represents a part of the payment towards price on the product (s) which will be delivered at a later date

• Installment credit:

Under this type of scheme only small amount of money is paid at the time of delivery of article and rest of amount is fixed on installment. Now a days it is becoming more popular source of financing for consumer goods like television, refrigerator as well as industrial goods.

Fund Based Financing

Financial service involves credit offered by banks in the form of loans, overdrafts and other cash transactions.

Non-Fund Based financing:

In a non-fund-based financial service, the bank does not deal with funds or cash transactions. Some examples of this type of service are bonds, letters of guarantee and letters of credit.

In today’s scenario, there are plenty of options available for SMEs to get finance from various financial institutions. It is most important to choose your financial institution carefully so that your business gets finance at low interest.

Of all the choices available you usually get stuck between a bank or NBFC.

NBFC is a financial institution that provides financial services without holding a banking license. NBFCs are registered under the Companies Act and regulated by RBI.

While a bank is a financial institution that accepts deposits from the public and creates credit, banks can perform lending activities either directly or indirectly through capital markets.

The functions of NBFCs are limited to the extent that they can accept/renew public deposits for a minimum period of 1 year to 5 years. The maximum interest rate an NBFC can offer is 12.5%. Also, keep in mind that the RBI doesn’t guarantee the repayment of deposits by NBFCs, unlike banks. Since NBFCs don’t form a part of the payment and settlement system, they cannot issue a cheque to their customers.

At the end of the day, a Company would want to consider both the advantages and downsides of short-term financing to determine if it's suitable for the company.

The advantages of short-term financing are:

• Quick Capital:

First and foremost, short-term lending provides small firms with immediate operating cash.

• Easier to qualify for

To qualify for funding, most short-term loan providers will need lower personal credit ratings and fewer time in business.

If a company is historically less qualified—with a poor credit score and no company experience—it may only be able to fund through short-term borrowing.

• Low cost of capital

Short-term debt generally accumulates less interest since borrowers return it in a shorter payback time.