Sources Of Short Term Finance
Sources of short term finance
1) Trade creditors
This the basic source of finance and many entrepreneurs do not realise that by acquiring items on credit they are obtaining short term finance. Credit just like any other source of finance has interest element hidden which most are not able to recognise. The discount may be offered to encourage early payment and the receiving company may not advantage of the discount the cost arise. It is not a cheap source of finance. On occasions, trade credit is used is used because the buyer is not aware of the real costs involved- if he were, he might turn to other sources of trade finance. However, other forms of capital are not always available, and for a company that has borrowed as much as possible trade credit may be the only choice left. This is an important source of capital for many small companies. A company which provides credit to another is in fact putting itself in the position of a banker whose advance takes the form not of cash but of goods for which payment will be deferred. This use of trade credit between companies is extremely important from both an industrial and a national point of view.
Terms of Trade Credit
Terms of credit vary considerably from industry to industry. Theoretically, four main factors are determined the length of credit allowed.
1. The economic nature of the product: products with a high sales turnover are sold on short credit terms. If the seller is relying on a low profit margin and a high sales turnover, he cannot afford to offer customers a long time to pay.
2. The financial circumstances of the seller: if the seller’s liquidity position is weak he will find it difficult to allow very much credit and will prefer an early cash settlement. If the credit term is used as part of sales promotion then, he may allow more credit days and use other means for improving liquidity position.
3. The financial position of the buyer. If the buyer is in weak liquidity position he may take long time to
1) Trade creditors
This the basic source of finance and many entrepreneurs do not realise that by acquiring items on credit they are obtaining short term finance. Credit just like any other source of finance has interest element hidden which most are not able to recognise. The discount may be offered to encourage early payment and the receiving company may not advantage of the discount the cost arise. It is not a cheap source of finance. On occasions, trade credit is used is used because the buyer is not aware of the real costs involved- if he were, he might turn to other sources of trade finance. However, other forms of capital are not always available, and for a company that has borrowed as much as possible trade credit may be the only choice left. This is an important source of capital for many small companies. A company which provides credit to another is in fact putting itself in the position of a banker whose advance takes the form not of cash but of goods for which payment will be deferred. This use of trade credit between companies is extremely important from both an industrial and a national point of view.
Terms of Trade Credit
Terms of credit vary considerably from industry to industry. Theoretically, four main factors are determined the length of credit allowed.
1. The economic nature of the product: products with a high sales turnover are sold on short credit terms. If the seller is relying on a low profit margin and a high sales turnover, he cannot afford to offer customers a long time to pay.
2. The financial circumstances of the seller: if the seller’s liquidity position is weak he will find it difficult to allow very much credit and will prefer an early cash settlement. If the credit term is used as part of sales promotion then, he may allow more credit days and use other means for improving liquidity position.
3. The financial position of the buyer. If the buyer is in weak liquidity position he may take long time to