FINANCING OF

SHORT-TERM
WORKING
CAPITAL

Presented by : GROUP 5
 SHORT-TERM WORKING CAPITAL
INSTRUMENTS
 Indigenous Bankers

 Trade Credit

 Installment Credit

 Advances

 Accounts Receivable Credit or Factoring

 Accrued Expenses

 Deferred Expenses

 Commercial Paper

 Commercial Banks
 INDIGENOUS BANKERS
 Defined as ; “an indigenous banker or bank is defined as an

individual or private firm which receives deposits , deals in hundies

or engages itself in lending money ”

 Plays a vital role in the Indian money market

 Their functions are : accepting deposits , lending loans , business in

hundies , non-banking functions such as :- trading business , act as

agents for commission , etc.

 They charge higher interest rates

 Indigenous banking is mostly confined to certain castes known as

Marwari's , Jain’s , chettiar’s, etc .

ADVANCES
 It is a short term source of finance

 Business houses get advances from their

customers and agents against orders

 It is a cheap source of finance

 To minimize investment in working capital some

firms prefer to take advances from their
customer
 COMMERCIAL PAPER
 Commercial paper is an unsecured short-term debt financial instrument
issued by a corporation

 Matures before nine months (270 days), and is only used to fund operating
expenses or current assets (e.g., inventories and receivables) and not used
for financing fixed assets, such as land, buildings or machinery

 The debt is usually issued at a discount, reflecting prevailing market

interest rates

 It is not usually backed by any form of collateral

A corporate would be eligible to issue CP provided:

(a) Company has to be listed in the Stock Exchange

(b) the tangible net worth of the company, as per the latest audited

balance sheet, is not less than Rs. 4 crore;

(c) a maximum permissible bank finance of Rs.25 crores

Issued in 2 ways:

 The issuer can market the securities directly to a buy and hold investor

 The issuer can sell the paper to a dealer, who then sells the paper in the

market
Benefit:

 Does not require to be registered with the Securities and

Exchange Commission (SEC) as long as it matures before nine

months (270 days), making it a very cost-effective means of

financing

 It is a cheaper source of raising short-term finance

 Wide range of maturity provide more flexibility

Disadvantages:

 It is a source of finance for large companies enjoying high credit

rating

 Cannot be redeemed before the maturity date

 WORKING CAPITAL FINANCE BY
COMMERCIAL BANKS
 Commercial banks are the important source of short term capital

 They provide variety of loans tailored to meet specific requirements of a

concern

 The different forms in which banks normally provide loans and advances
are as follows:
 Loans
 Cash credits
 Overdrafts
 Purchasing and discounting of bills
 LOANS

 When a bank makes an advances in lump sum against some security

it is called loan

 Paid as cash or by credit to account

 Borrower is required to pay interest from the date of sanction

 Loan is repayable in lump sum or installments

 Commercial banks provide short term loans up to one year