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Financing of Short term Working Capital-Indigenous Bankers, Trade Credit & Bills Payables (in Hindi)
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Heena Malhotra
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  1. Management of Working Capital By Heena Malhotra


  2. Spontaneous Sources: Spontaneous sources of finance are those which naturally arise in the course of business operations. Trade credit, credit from employees, credit om suie o ei n ma etdi respect. Negotiated Sources On the other hand the negotiated soures, as the name implies, are those which have to be specifcal negotiated with lenders say,commercial banks, fnancia lnstutin, general pubilc et. By Heena Malhotra


  3. Financing of short-term working capital oSpontaneous sources O Trade Credit o Accrued Expenses o Bills Payable By Heena Malhotra


  4. Financing of short-term working capital o Indigenous Bankers O Installment Credit o Advances Accounts Receivable Credit Factoring O Deferred Incomes o Commercial Paper O WC Finance by Commercial Banks. By Heena Malhotra


  5. 1. Indigenous Bankers: o Private money-lenders and other country bankers used to be the only source of finance prior to the establishment of commercial banks. They used to charge very high rates of interest and exploited the customers to the largest extent possible. Now-a- days with the development of commercial banks they have lost their monopoly. o But even today some business houses have to depend uporn indigenous bankers for obtaining loans to meet their working capital requirements. By Heena Malhotra


  6. 2. Trade Credit: O Trade credit refers to the credit extended by the suppliers of goods in the normal course of business. As present day commerce is built uporn credit, the trade credit arrangement of a firm with its suppliers is an important source of short-term finance o The credit-worthiness of a firm and the confidence of its suppliers are the main basis of securing trade credit. It is mostly granted on an open account basis whereby supplier sends goods to the buyer for the payment to be received in future as per terms of the sales invoice. It may also take the form of bills payable whereby the buyer signs a bill of exchange payable on a specified future date. By Heena Malhotra


  7. o When a firm delays the payment beyond the due date as per the terms of sales invoice, it is called stretching accounts payable. A firm may generate additional short-term finances by stretching accounts payable, but it may have to pay penal interest charges as well as to forgo cash discount. If a firm delays the payment frequently, it adversely affects the credit worthiness of the firm and it may not be allowed such credit facilities in future. By Heena Malhotra


  8. 3. Installment Credit: O This is another method by which the assets are purchased and the possession of goods is taken immediately but the payment is made in installments over a pre-determined period of time. Generally, interest is charged on the unpaid price or it may be adjusted in the price. But, in any case, it provides funds for some time and is used as a source of short-term working capital by many business houses which have difficult fund position. By Heena Malhotra


  9. 4. Advances: o Some business houses get advances from their customers and agents against orders and this source is a short-term source of finance for them. It is a cheap source of finance and in order to minimize their investment in working capital, some firms having long production cycle, specially the firms manufacturing industrial products prefer to take advances from their customers. By Heena Malhotra


  10. 5. Factoring or Accounts Receivable Credit: o Another method of raising short-term finance is through accounts receivable credit offered by commercial banks and factors. A commercial bank may provide finance by discounting the bills or invoices of its customers. O Thus, a firm gets immediate payment for sales made on credit. A factor is a financial institution which offers services relating to management and financing of debts arising out of credit sales. Factoring is becoming popular all over the world on account of various services offered by the institutions engaged in it. o Factors render services varying from bill discounting facilities offered by commercial banks to a total takeover of administration of credit sales including maintenance of sales ledger, collection of accounts receivables, credit control and protection from bad debts, provision of finance and rendering of advisory services to their clients. Factoring may be on a recourse basis, where the risk of bad debts is borne by the client, or on a non-recourse basis, where the risk of credit is borne by the factor. By Heena Malhotra


  11. Financing of short-term working capital oSpontaneous sources O Trade Credit o Accrued Expenses o Bills Payable By Heena Malhotra


  12. 8. Commercial Paper: o Commercial paper represents unsecured promissory notes issued by firms to raise short-term funds. It is an important money market instrument in advanced countries like U.S.A. In India, the Reserve Bank of India introduced commercial paper in the Indian money market on the recommendations of the Working Group on Money Market (Vaghul Committee). O But only large companies enjoying high credit rating and sound financial health can issue commercial paper to raise short-term funds. The Reserve Bank of India has laid down a number of conditions to determine eligibility of a company for the issue of commercial paper. Only a company which is listed on the stock exchange, has a net worth of at least Rs 10 crores and a maximum permissible bank finance of Rs 25 crores can issue commercial paper not exceeding 30 per cent of its working capital limit.


  13. (b) Cash Credits: oA cash credit is an arrangement by which a bank allows his customer to borrow money up to a certain limit against some tangible securities or guarantees. The customer can withdraw from his cash credit limit according to his needs and he can also deposit any surplus amount with him. O The interest in case of cash credit is charged on the daily balance and not on the entire amount of the account. For these reasons, it is the most favourite mode of borrowing by industrial and commercial concerns. By Heena Malhotra


  14. (a) Loans: o When a bank makes an advance in lump-sum against some security it is called a loan. In case of a loan, a specified amount is sanctioned by the bank to the customer. The entire loan amount is paid to the borrower either in cash or by credit to his account. The borrower is required to pay interest on the entire amount of the loan from the date of the sanction. o A loan may be repayable in lump sum or installments. Interest on loans is calculated at quarterly rests and where repayments are stipulated in installments, the interest is calculated at quarterly rests on the reduced balances. Commercial banks generally provide short-term loans up to one year for meeting working capital requirements. But now-a-days term loans exceeding one year are also provided by banks. The term loans may be either medium-term or long- term loans


  15. (c) Overdrafts: o Overdraft means an agreement with a bank by which a current account-holder is allowed to withdraw more than the balance to his credit up to a certain limit. There are no restrictions for operation of overdraft limits. The interest is charged on daily overdrawn balances. The main difference between cash credit and overdraft is that overdraft is allowed for a short period and is a temporary accommodation whereas the cash credit is allowed for a longer period. Overdraft accounts can either be clean overdrafts, partly secured or fully secured By Heena Malhotra


  16. (d) Purchasing and Discounting of Bills: o Purchasing and discounting of bills is the most important form in which a bank lends without any collateral security. Present day commerce is built upon credit. The seller draws a bill of exchange on the buyer of goods on credit. Such a bill may be either a clean bill or a documentary bill which is accompanied by documents of title to goods such as a railway receipt. O The bank purchases the bills payable on demand and credits the customer's account with the amount of bill less discount. At the maturity of the bills, bank presents the bill to its acceptor for payment. In case the bill discounted is dishonoured by non-payment, the bank recovers the full amount of the bill from the customer along with expenses in that connection. By Heena Malhotra