Question

Mention any four sources of short term credit required by business concerns?

Answer 1

Short-term finance is the finance that is generated from the outsiders to meet the day-to-day affairs of the business. Any four sources to generate such finance are:

1. Trade credit:- Trade credit refers to the type of finance raised when goods are purchased in terms of a short credit by the buyer from its ultimate supplier under some written agreement. It also refers to an arrangement whereby a manufacturer is granted credit from the suppliers to allow their customer to pay their outstanding balance within a credit period. Generally, the duration of trade credit is three to six months and thus it is a short-term financing facility.

2. Public deposits:- Public deposits refers to unsecured deposits invited from the public. A company wishing to invite public deposits place an advertisement in the newspaper. Any member of the public can fill up the prescribed form and deposit money with the company. Generally, the public deposit can be invited by companies for a period of six months to 1 year.

3. Loan from commercial banks:- Commercial bank occupies a very important position as they provide funds for different purposes. Firms of all sizes can approach commercial banks. Generally, commercial banks provide short-term and medium-term loans but nowadays they have started giving long-term loans against security.

4. Inter-corporate Deposits:- It is the deposit made by one company with another company. This option of using finance is available to all public companies whether having share capital or not. It includes

• When a company acquires security of another company.
• When a company gives a loan to another company.
• When company gives a guarantee to any person or institution who provides a loan to another company. In general, we can say when companies arrange funds from another company it is known as an Inter-corporate Deposit.