Sources of Short

Term Funds

Birju Shah
Samarjeet Parmar
Hitendrasinh Chauhan
 Introduction

• Typically, the CAs of a firm are supported by a

combination of long-term and short-term sources of
financing.

• Following are sources of finance that more or less

support CAs:
Advances , Accruals, Trade Credit, Commercial Bank
Advances, Public Deposits, Inter-corporate Deposits,
Short-term loans from FIs, Commercial Paper, Leasing
and Factoring.
 ACCRUALS

• Major accrual items are wages and taxes.

• Where firm owes to its employees and to the
government.
• They vary almost spontaneously with the level of
activity of the firm.
• While accruals are a welcome source of financing they
are typically not amenable to control by management.
 TRADE CREDIT

• Represents the credit extended by the supplier of

goods and services.
• The confidence of suppliers is the key to securing
trade credit. So, what do suppliers look for in granting
trade credit?
• Earnings record over a period of time; Liquidity
position of the firm; and, Record of payment.
• The cost of trade credit depends on the terms of
credit offered by the supplier. When the supplier
offers discount for prompt payment, trade credit
availed beyond the discount period is quite costly.
 BANK ADVANCES
• Application & Processing
• Sanction and Terms & Conditions
• Working capital advances:
Cash Credits/Overdrafts; Loans; Purchase/Discount of
Bills; and, Letter of Credit
• Security: Hypothecation or Pledge
• Margin Amount:
Banks do not provide 100% finance. The portion
brought in by borrower is known as margin amount.
“Margin is kept lowest for RMs and highest for ARs.”
 PUBLIC DEPOSITS

• These are solicited unsecured deposits from the public

in recent years, mainly to finance working capital
requirements.

• The maximum maturity period allowed for public

deposits is 3 years for manufacturing companies and 5
years for finance companies.

• Companies derive advantages like no security offered,

fairly simple procedure, and the post-tax cost is fairly
reasonable.
 INTER-CORPORATE
DEPOSITS

• A deposit made by one company, with another,

normally for a period up to 6 months.
• Such deposits are usually of 3 types: call deposits, 3-
m deposit, and 6-m deposits.
• Inter-corporate deposit market has 3 salient features:
lack of regulation, secrecy, and importance of
personal contact.
 FIs: SHORT-TERM
LOANS

• The LIC, GIC, and UTI provide short-term loans to

manufacturing companies with excellent track record.
• A company is eligible for such loans: if it has declared
an annual dividend of not less than 6% for past 5
years; debt-equity ratio does not exceed 1.5:1;
current ratio, at least 1.33; and interest coverage ratio
for past 3 years should be at least 2:1.
• Totally unsecured and given on strength of a demand
promissory note.
 COMMERCIAL
PAPER
• Represents short-term unsecured promissory notes
issued by firms which enjoy a fairly high credit rating.
• Maturity period ranges from 90 to 180 days.
• Sold at a discount from its face value and redeemed
at its face value.
• Is either directly placed with investors or sold through
dealers.
• RBI has stipulated only financially strong companies
can issue commercial paper.
 LEASING

• Financial lease
• Operating lease
• Sale and lease back
• Direct lease
• Leveraged Lease
• Primary and secondary lease
 FACTORING

• A ‘Factor’ is a financial institution which offers services

relating to management and financing of debts arising
from credit sales.
• Factoring involves sale of accounts receivable to a
factor who charges a commission and may or may not
bear the credit risks associated with the accounts
receivable purchased by it.
 SOURCE

• Financial Management
By: M Y Khan & P K Jain

• Financial Management
By: Prasanna Chandra

• www.wikipedia.com
 CREDIT

Dr. Siddharth G. Das

Any Questions ?