Sardar Patel Institute of Technology

Assignment 1
Subject: Finance for Engineers – II

Group no.: 3 (SE EXTC)

Faculty: Mr. Mangesh More

Group members:

1. Gawas Narayan Dhayaba - 2021201070

2. Gawas Gaurang Shankar - 2021201071
3. Sherkhane Mitali Sudhir - 2021201072
4. Patil Sahil Yogesh - 2021201073
5. Pachkale Rina Prakash - 2021201074
6. Bargal Suyash Anil - 2021201075
7. Jagtap Shashank Dnyaneshwar - 2021201076
8. Shirke Shubham Prakash - 2021201077
9. Shinde Rutika Rajaram - 2021201078
10. Mahajan Virendra Vishwanath - 2021201079
11. Choughule Siddhesh Shridhar - 2021201080
5. Explain internal short-term sources of raising finance for a company, along with advantages &
disadvantages of each

• Short term finance refers to financing needs for a small period normally less than a
year.
• Internal sources of finance are any funds that a business can generate on its own.

Internal Short-Term sources of finance

1. Provision for taxation:
Provision for taxation is the provision made out of current profits to meet the tax
obligation. There is a time gap between the provision made and payment of the actual tax
liability. So it serves as a source of short-term finance during the intermediate period.

• Advantages:
o It is a cheaper source of finance and does not involve any cost.
o There is no obligation of payment of any cost of capital.

• Disadvantages:
o Provision for taxation provides funds for a very short period.
o Sometimes excess provision may be created which might lead to misuse of
funds.

2. General Reserves:
General reserve is referred to as the reserve fund that is created by keeping aside a part
of profit earned by the business during the course of an accounting period for fulfilling
various business needs like meeting contingencies, offsetting future losses, enhancing
the working capital, paying dividends to the shareholders, etc.

• Advantages:
o It acts as an additional source of working capital for the business, thereby
improving the financial position of the business.
o It helps in overcoming any future losses that may arise during the course of
business operations.
o It helps in providing funds for the purchase of new assets without any need
of borrowing from other sources.

• Disadvantages:
o It does not help determine the true financial position of the business as it
will cover for any liabilities or contingencies.
o As this reserve is created without any specific purpose, mismanagement of
funds may occur.
 o It reduces the rate of dividend as the reserve is created out of the profits
earned by the business.

3. Provision for dividend

Proposed dividend is another important source of financing temporary working capital
like the provision for taxation. It also provides funds for financing the time gap between
dividend proposed and the dividend distributed to the shareholders.

• Advantages:
o It is the cheapest source of financing—like provision for taxation.
o It does not require any obligation on the part of the company to pay any
interest.

• Disadvantages:
o It provides funds for a very short period.
o Finance available through this source is very small in value.

4. Employees deposit
5. Director’s loan
6. Explain external short-term sources of raising finance for a company, along with advantages &
disadvantages of each.

• Short term finance refers to financing needs for a small period normally less than a year.
• External sources of finance imply the arrangement of capital or funds from sources
outside the business.

External Short-Term sources of finance

1. Bank O/D
Overdraft is a credit facility in which the money can be withdrawn from the current or
savings account, even if the account balance is zero or even below.

• Advantages:
o Helps in managing business cash flow
o Fulfils urgent cash crunch requirements
o Interest is paid only on the utilized amount
o Can be withdrawn at short notice
o No collateral required by banks

• Disadvantages:
o Higher interest rate
o Offered only to bank account holders
o The sanctioned limit depends upon the applicant’s financials
o Short-term borrowing – revises every year
o Not suitable for long-term finance

2. Cash credit
A Cash Credit (CC) is a short-term source of financing for a company. In other words, a
cash credit is a short-term loan extended to a company by a bank. It enables a company
to withdraw money from a bank account without keeping a credit balance. The account is
limited to only borrowing up to the borrowing limit.

• Advantages:
o A cash credit is an important source of working capital financing, as the
company need not worry about liquidity issues.
o It can be easily arranged by a bank, provided that collateral security is
available to be pledged and the realizable value of such is easily determined.
o Withdrawals on a cash credit account can be made many times, up to the
borrowing limit, and deposits of excess cash into the account lower the
burden of interest that a company faces.
o Interest payments made are tax-deductible and, thus, reduce the overall tax
burden on the company.
 o A cash credit reduces the financing cost of the borrower, as the interest
charged is only on the utilized amount or minimum commitment charge.

• Disadvantages:
o The interest rate charged by a loan on cash credit is very high compared to
traditional loans.
o A minimum commitment charge is imposed on the borrower regardless of
whether the company utilizes its cash credit or not.
o The short-term loan is extended to the borrower depending on the borrower’s
turnover, accounts receivable balance, expected performance, and collateral
security offered. Therefore, it can be difficult for new companies to obtain.
o The loan is a short-term source of financing. A company cannot rely on it for
an extended period of time. After the expiration of the loan, it must be
renewed under new terms and conditions.

3. Trade deposits

4. Public deposits
Public Deposit can be described as a form of short-term financing, often unsecured in
which the company invites deposits from the general public to fulfill its working capital
requirements. In this, the general public, deposits money with non-banking companies. It
is just like a loan raised by the company from the public.

• Advantages:
o Economical: The company can get the public deposit at a very low cost, i.e.
just by placing the ad in the newspaper they can get the necessary funds in a
very short time. Also, it saves underwriting commission and brokerage. Most
importantly, interest is a tax-deductible expense on the income.
o Simple: The procedure of inviting public deposits is easy and uncomplicated,
as it involves a few legal formalities only.
o Trading on equity: Due to the fixed interest rate, the company can get
benefits from trading on equity because it can use the remaining profits to
distribute to the shareholders in the form of dividends. So, it can pay a higher
dividend to its equity holders, which will help in improving its reputation in
the market.
o No charge on assets: As it is an unsecured deposit, no charge is required to be
created on assets of the company.
o Eliminates Dependency: With public deposits, a large pool of investors can be
approached, which eliminates the dependency upon the single financial
institution or bank.
o No interference: As the funds are raised from depositors, who are not the
shareholders so there is no interference from their side because they do not
have voting rights.
 • Disadvantages:
o Uncertainty: Any person who has deposited their money can withdraw the
same at any time. This makes public deposits an uncertain source of finance
as premature withdrawals can affect the financial standing of the company
badly.
o Risk to investors: Due to lack of collateral, depositors’ investment is always at
risk. The company’s management may use the deposits in the way they feel
right.
o Restricts growth of the capital market: With the extensive use of public
deposits, capital market growth is restricted. It disturbs the interest rate
pattern which leads to the shortage of sound industrial securities.
o Speculation: With the help of surplus deposits, the company’s management
may be enticed to involve in overtrading and speculation.
o Lack of Attraction for Professional Investors: Public Deposits do not attract
professional investors, because of lack of security as mortgage or charge on
company’s assets.

5. Bill discounting
In bill discounting, the business discount the outstanding invoices to gain access to short-
term financial assistance and maintain the working capital. This process is also called
“Invoice Discounting”.

• Advantages:
o Cash flow: Businesses being dependent on the cash flow to sustain their
business can easily rely on this quick financial aid to access speedy funds and
continue to flourish. This process quickens money inflow— profiting the
organization in expanding deals, seeking after development, securing
hardware, etc.
o Instant access to cash: Bill discounting is a more efficient, faster way of
assessing working capital as it is hassle-free and does not involve the lengthy
documentation procedure.
o No collateral involved on TReDS: here is no requirement to keep any asset as
security as the unpaid invoice is considered as the collateral itself.
o No debt incurred: Bill discounting helps in saving tax liability. The chances of
a company suffering any loss or damage are almost nonexistent when
compared to conventional financing frameworks.

• Disadvantages:
o Risk of fraud or illegitimacy of transactions
 o Risk of bad debts (non-payment of dues by the buyer or buyer insolvency)
o Cost of funds higher than many other financing options like bank overdraft

6. Short term loans

A short term loan is a valuable option, especially for small businesses or start-ups that are
not yet eligible for a credit line from a bank. The loan involves lower borrowed amounts,
which may range from $100 to as much as $100,000. Short term loans are suitable not
only for businesses but also for individuals who find themselves with a temporary, sudden
cash flow issue.

• Advantages:
o Shorter time for incurring interest: As short term loans need to be paid off
within about a year, there are lower total interest payments. Compared to
long term loans, the amount of interest paid is significantly less.
o Quick funding time: These loans are considered less risky compared to long
term loans because of a shorter maturity date. The borrower’s ability to repay
a loan is less likely to change significantly over a short frame of time. Thus, the
time it takes for a lender underwriting to process the loan is shorter. Thus, the
borrower can obtain the needed funds more quickly.
o Easier to acquire: Short term loans are the lifesavers of smaller businesses or
individuals who suffer from less than stellar credit scores. The requirements
for such loans are generally easier to meet, in part because such loans are
usually for relatively small amounts, as compared to the amount of money
usually borrowed on a long term basis.

• Disadvantages:
o The main disadvantage of short term loans is that they provide only smaller
loan amounts. As the loans are returned or paid off sooner, they usually
involve small amounts, so that the borrower won’t be burdened with large
monthly payments.

Reference Links:
1. https://www.yourarticlelibrary.com/economics/taxation/provision-for-taxation-
meaning-features-advantages-and-disadvantages/43837
2. https://byjus.com/commerce/general-
reserve/#:~:text=General%20reserve%20is%20referred%20to,capital%2C%20paying%20
dividends%20to%20the
3. https://www.yourarticlelibrary.com/financial-management/proposed-dividend-
meaning-features-advantages-and-disadvantages/43839
4. https://www.paisabazaar.com/business-loan/overdraft-account/
5. https://corporatefinanceinstitute.com/resources/knowledge/finance/cash-credit/
6. https://businessjargons.com/public-deposits.html
7. https://www.m1xchange.com/bill-discounting.php
8. https://www.creditmantri.com/bill-discounting/
9. https://corporatefinanceinstitute.com/resources/knowledge/finance/short-term-loan/