Source of short term finance refers to money that is needed for financial activities carried out for less than one year. These funds are usually used for day to day operations such as payment of wages, inventory ordering, advertisement expenses and so on.
There are different sources of rising the short time finance can vary according to way of their usage.
This is a temporary source found that is provided by bank in which business has a bank account. Overdraft is a facility to allow the business to withdraw from its current account exceeding the available cash balance. The business is charged interest based on amount overdrawn and the length of time overdrawn. There are some advantages and disadvantages of bank overdraft.
Flexibility is the main advantage of this source. Banks have flexibility to adjust the level of overdraft facility. This means that it allows the business to arrange special payments. The other advantage of overdraft can be seen its quick feature that is easy providing cash flow that is needed immediately.
On the other hand, in short time, overdrafts have disadvantages. Firstly, overdraft’s cost is the essential drawback. Overdraft’s interest can be fairly high rates especially for small companies. If the money can not pay back on time, business faces large charges because of high interest rates. In addition, most times, overdrafts need to be secured on business assets and this put the assets at risk, in case business can not meet repayments.
Leasing is a kind of hiring agreement between lessor and the business that can not afford the full of expensive item (e.g. vehicles, machinery) in one go. The business pays the leasing company each month, although the business doesn’t actually own item. Length of a lease contract time depends on details of product, such as cost and usable life.
Using leasing as a source of finance has some advantages. Firstly, the...