Managing Short Term Financing

  • Working Capital Management ensures that a company has sufficient funds to finance its day to day operations. If the cash flow of the company is a deficit and the company requires money to carry out its operations, then it uses short term financing.
  • Short Term Financing refers to the financing of day to day operating activities from short term sources which are for less than 1 year, however, it must be noted here that the amount being financed through short term sources is not a large amount.

Short Term Financing Methods

  1. Working Capital Loans: These are short term loans provided by Bank or Financial Institutions and an Interest is charged by the bank with the option to pay back the loan in instalment or paying in full.
  2. Trade Credit: This is a credit limit provided by Vendors and Suppliers and the payments are deferred for a specific period without any charges.
  3. Invoice Discounting: This is a facility provided by Banks, Financial Institution, or any Third Party in which they discount (or pay less) the receivable bills of the company. The right of receiving the payment of these bills passes to the Discounting Organization.
  4. Line of Credit: This is a facility provided by Banks and Financial institutions in which a certain limit of credit is allotted to a company and the company may withdraw and deposit the amount as and when required subject to an upper limit.
Short term Finances have various advantages that include less interest, quick disbursement, easy process, etc., however, the amount of allotted is small and is intended for working capital needs only.
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