Short Term Finance:
Short-term finance is needed to fulfill the current needs of the business. The present conditions may include paying taxes, salaries or wages, repair expenses, compensation to the creditor, etc. The need for short-term finance arises because sales revenues and purchase payments are not the same at all times. Sometimes sales can be low as compared to purchases. Other deals may be on credit while purchases are on cash. So, short-term finance is needed to match this disequilibrium.
Sources of short term finance are as follows:
(i) Bank Overdraft: Bank overdraft is a very widely used source of business finance. Under this client can draw a certain sum of money over and above his original account balance. Thus it is easier for the businessman to meet unexpected short-term expenses.
(ii) Bill Discounting: Bills of exchange can be discounted at the banks. This provides cash to the holder of the bill, which can be used to finance immediate needs.
(iii) Advances from Customers: Advances are primarily demanded and received for the confirmation of orders. However, these are also used to finance the operations necessary to execute the job order.
(iv) Installment Purchases: Purchasing on installment gives more time to make payments. The deferred payments are used as a source of financing small expenses, which are to be paid immediately.
(v) Bill of Lading: Bill of lading and other export and import documents are used as a guarantee to take a loan from banks, and that loan amount can be used as finance for a short period.
(vi) Financial Institutions: Different financial institutions also help people in business to get out of financial difficulties by providing short-term loans. Certain co-operative societies can arrange short-term financial assistance for business people.