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Short term source - Letter of Credit & Long Term Sources - Shares, Debentures & Public Deposits
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Heena Malhotra
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  1. Management of Working Capital By Heena Malhotra


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


  3. 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


  4. 9. Working Capital Finance by Commercial Banks: o Commercial banks are the most important source of short-term capital. The major portion of working capital loans are provided by commercial banks. They provide a wide variety of loans tailored to meet the specific requirements of a concern. O The different forms in which the banks normally provide loans and advances are as follows: o (a) Loans o (b) Cash Credits 0 (c) Overdrafts O (d) Purchasing and discounting of bills. By Heena Malhotra


  5. Letter of Credit: o A letter of credit popularly known as L/c is an undertaking by a banlk to honour the obligations of its customer up to a specified amount, should the customer fail to do so. It helps its customers to obtain credit from suppliers because it ensures that there is no risk of non- payment. L/c is simply a guarantee by the bank to the suppliers that their bills up to a specified amount would be honoured. In case the customer fails to pay the amount, on the due date, to its suppliers, the bank assumes the liability of its customer for the purchases made under the letter of credit arrangement. By Heena Malhotra


  6. Financing of Long-Term Working Capital By Heena Malhotra


  7. Negotiated Sources: On the other hand the negotated soures, s the name implies are those which have to be speifial negotated with lenders say commercal banks, fnancia istitutions,general publcetc By Heena Malhotra


  8. Long-Term Working Capital Source 0 1. Shares O2. Debentures O 3. Public Deposits O4. Ploughing Back of Profits O 5. Loans from Financial Institutions By Heena Malhotra


  9. 1. Shares: o Issue of shares is the most important source for raising the permanent or long-term capital. A company can issue various types of shares as equity shares, preference shares. o Preference shares carry preferential rights in respect of dividend at a fixed rate and in regard to the repayment of capital at the time of winding up the company. Equity shares do not have any fixed commitment charge and the dividend on these shares is to be paid subject to the availability of sufficient profits. As far as possible, a company should raise the maximum amount of permanent capital by the issue of shares. By Heena Malhotra


  10. 2. Debentures: o A debenture is an instrument issued by the company acknowledging its debt to its holder. It is also an important method of raising long-term or permanent working capital. The debenture- holders are the creditors of the company. A fixed rate of interest is paid on debentures. The interest on debentures is a charge against profit and loss account. By Heena Malhotra


  11. o Public deposits as a source of finance have a large number of advantages such as very simple and convenient source of finance, taxation benefits, trading on equity, no need of securities and an inexpensive source of finance o But it is not free from certain dangers such as it is uncertain, unreliable, unsound and inelastic source of finance. The Reserve Bank of India has also laid down certain limits on public deposits. Non-banking concerns cannot borrow by way of public deposits more than 25% of its paid-up capital and free reserves. By Heena Malhotra


  12. 5. Loans from Financial Institutions: O Financial institutions such as Commercial Banks, Life Insurance Corporation, Industrial Finance Corporation of India, State Financial Corporations, State Industrial Development Corporations, Industrial Development Bank of India, etc. also provide short-term, medium-term and long-term loans. O This source of finance is more suitable to meet the medium-term demands of working capital. Interest is charged on such loans at a fixed rate and the amount of the loan is to be repaid by way of installments in a number of years. By Heena Malhotra