Sources of Finance in Short Term 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. Bank Overdraft 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 Finance Leasing is a kind of hiring agreement between lessor and the business that an 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 business doesn’t have to pay full cost of item outright, so that this can be cheaper and allow the business to buy better equipment that can be more beneficial to the business. The advantage is about security.
There is a security on the item leased but the business is less likely to needed additional security as with a loan. Furthermore, the payments of leasing are generally fixed and not changeable as interest rates. This allows the business to keep a much better control over current and future cash flow. Lastly, the leasing company is responsible for the maintenance of leased item and this provides the business to able to reduce their costs.
Alongside of advantages mentioned above, the companies which buy equipments with leasing often face some difficulties.Firstly, because of equipment is not on the business’ behalf, they are unable to sell it in the event it is no longer needed and they can not upgrade to a newer or better product without paying a large fee to cancel the contract. Other drawback of leasing is that the business has to pay over a number of years for item, but at the end of the lease, the cost of item will be more than its actual cost. These two different costs should be considerer by the business. Additionally, although the leasing company own the leased equipment, generally the business is responsible for its maintenance and repair costs.
Credit Cards Today a large number of businesses use their credit cards for short term finance. Business credit carts works in the same way as personal credit cards. When the company buys a purchase on credit card, they will receive a statement with detail of expenses on it. Credit carts are generally used for small items in order not to pay cash outright. Using credit card in financial activities has some advantages. Firstly, credit cards are extremely useful and companies can make their payments quickly and easily even if they are abroad because most credit card are accepted all over the world.
Credit cards is also used on internet buying online purchases such as plane ticket, computer equipments etc. which will take long time to be bought from out. Moreover, it is a facility to buy something outright but paying later, if company is in cash flow problem. The company has a certain period of time for repayments before paying interest.
In addition, manageability is the other positive feature of credit cards. Credit card statement received online or in bill makes easier to keep track all purchases are bought on credit card.On the other hand, most credit cards have higher interest rates than loan or overdraft and withdrawing cash from a credit card expose even higher interest. Moreover, if the company doesn’t pay off its bill on time, the interest will quickly add up.
Bank loans For companies, bank loans can be said the most common types of finance compared to others. The way of working bank loans system is a very simple. Bank lends company money with arranged repayment period at a particular interest rate. As any other loans, there are some secured against the business assets in case the money isn’t paid back.One of the main advantages of this form of finance is reliability.
Loans are reliable and secure; you are guarantied for the money duration of the loan. Moreover, loans are very flexible and can be arranged amount of the money and repayment term and interest rates. Unless a company chooses a loan with variable interest rate, it is very clear to know when or how the amount of money has to be paid. Lastly, cost of loans is rarely cheap but its value generally much better than credit cards or overdraftsDisadvantages of bank loan are similar to other form of finance.
If the loan can not be repaid, the company’s assets will be under threat. However, because of loans amount used as sort time finance, it is generally afforded without living any difficulty. Trade Credits Trade credit is a kind of payment facility given by supplier. The company has a open account with its supplier and it has a period of time to pay after buying goods or services. This repayment period that is determined by two sides generally can be last from 28 months to a year.
If the payments are made in this term, the supplier doesn’t charge any fee or interest. There are some advantages of this common short time finance. When the company doesn’t have the enough cash to buy the stock, this credit provides a later payment facility for the company. After the products have been sold and the profit has been made, the company can pay its supplier easily.
The other advantage of trade credit is to improve the positive cash flow that provides a smoother business operation for the company.Moreover, with postponing payments enable the company to focus on other business activities such as production, marketing, sales and so on. Nevertheless, this form of financial source has some risks affects companies negatively. If a company don’t pay its dept on time, it will be charged interest or fee to pay. Actually in this case, the important loss is not the money paid with interest; the real ravage is the company’s reliability that has been damaged. Because, most companies with a bad credit history can not be accepted to get new trade credits.
