The short-term funding is taken for a time less than one year. It is taken in advance from banks and other lenders of short-term funding in the money market. Short-term funding comprises working capital loan from banks, public deposits, commercial papers, factoring of accounts receivables, etc.
Spontaneous financing refers to the unplanned sources of short-term funding arising in the ordinary course of a business. Trade supplier’s credit and outstanding expenditures are examples of spontaneous funding.
There is no clear cost of spontaneous funding. A company is likely to make use of these sources of funding to the fullest level. The actual option of funding current assets, once the
Spontaneous means of funding have been entirely used, is between the long-term and short-term sources of funding.
Indigenous Bankers
Private money lenders were the major source of finance prior to the establishment of commercial banks. They used to charge very high rates of interest. Even today some business houses depend upon indigenous bankers for their working capital requirement.
Trade credit
Trade credit refers to the credit extended by the suppliers of goods in the normal course of business. The credit worthiness of a firm and the confidence of its suppliers are the main basis of securing trade credit.
Business credit is typically a casual arrangement, and is arranged on an open account basis. A seller supplies products to the purchaser on credit which the buyer accepts, and therefore, in effect, agrees to pay the amount due as per sales condition in the bill. On the other hand, he does not officially concede it as a debt; he does not sign any official instrument. Once the trade links have been recognized between the buyer and the seller, they have each other’s mutual assurance, and business credit becomes a regular action which may be occasionally reviewed by the supplier. Open account trade credit appears as sundry creditors on the buyer’s balance sheet.
The main advantages of trade credit as a source of short term finance are
- It is an easy and convenient method of finance
- It is flexible as the credit increases with the growth of the firm
- It is informal and spontaneous source of finance
Major disadvantage of this method is charging of higher prices by the suppliers and loss of cash discount.
