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Rakhi Vasavada
Rakhi Vasavada, Financial and Legal Consultant
Category: Finance
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Experience:  Graduated in law with Emphasis on Finance and have have been working in financial sector for over 12 Years
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What are the five different sources of short-term financing?

Resolved Question:

What are the five different sources of short-term financing? What are the characteristics of each source and why might a compnay choose that one over the other?
Submitted: 5 years ago.
Category: Finance
Expert:  Rakhi Vasavada replied 5 years ago.

Dear Friend,

There are a number of sources of short-term finance which are listed
below:

1.Trade credit --- Trade credit refers to credit granted to manufactures and traders by the suppliers of raw material, finished goods, components, etc. Usually
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 does not make the funds available in cash but it facilitates purchases without making immediate payment. This is quite a popular source of finance.

2.Bank credit -- Commercial banks grant short-term finance to business firms which is
known as bank credit. When bank 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. This included Loans, Cash Credit and discounting of Bills and Overdraft.

3.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. Customers generally agree to make advances when such goods are not easily available in the market or there is an urgent need of goods. A firm can meet its short-term requirements with the help of customers' advances.

4.Installment credit -- Installment credit is now-a-days a popular source of finance for
consumer goods like television, refrigerators as well as goods. You might be aware of this system. Only a small amount of money is paid at the time of delivery of such articles. The balance is paid in a number of installments. The supplier charges
interest credit. The amount of interest is included while deciding on the amount of installment. Another comparable system is the hire purchase system under which the purchaser becomes owner of the goods after the payment of last installment.
Sometimes commercial banks also grant installment credit if they have suitable arrangements with the suppliers.

5.Counter Trade --- Counter trade is a method of financing trade, but goods rather than money are used to fund the transaction. It is a form of barter. Goods are exchanged other goods. This form of business enterprises is diminishing in local trading but trade is still a popular way of funding the business activities.

I hope this helps.

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