Short-term financing can be obtained from various sources, such as commercial papers, unsecured bank loans, bank overdrafts, and trade credit. Some short-term borrowing instruments are listed below.
Commercial paper, or CP for short, is a short-term debt instrument companies use for short-term financial obligations such as funding new projects, collecting payments, etc. Fundraising through CP is usually reserved for companies with a high credit rating. There is a range of maturity periods from seven days to one year. The CP has no collateral and is an unsecured capital finance debt.
Small businesses looking for short-term financing can turn to commercial banks and private NBFCs. Loans provided by banks are of three kinds: single end-of-period payment loans, lines of credit, and committed and uncommitted borrowing lines. Single end-of-period payment loans require companies to pay fixed or variable interest on the loan and repay it in a lump sum at the end of the loan term.
It is typical for banks in India to offer lines of credit as cash credit, with interest being charged only on the actual balance utilized, and a floating charge is created in their favor); and bridge loans (to bridge the gap until a firm can arrange for long-term financing – interest is deducted at the start from the loan proceeds).
Collateral security, as capital finance, is provided by accounts receivable or inventory for companies to obtain secured loans. Firms can use accounts receivable as security by either pledging (the lender decides the invoices to choose, some 75% money is given, and in the event of default by customers, the firm is responsible) or factoring (the lender agrees to pay the firm at the end of the term minus the factoring fee). Factoring arrangements may be recourse-based (lenders take money from borrowers in the event of default) or non-recourse-based (lenders bear bad debts). Citibank Factors and SBI Factors are two of the leading factoring companies.
Having an overdraft means you can withdraw the money even if you have no balance. Individuals and businesses can withdraw cash over and above their available balances, provided that they pay within a specified timeframe.
Buyers and sellers of goods enter into this agreement. Buying goods, in this case, does not involve the buyer paying cash. A later date is set for payment. Trust is the basis of the relationship.
Accounts Receivable Financing:
Invoice discounting is available via corporate finance from several banks and non-banking financial institutions. Banks make payments minus a small fee for commercial bills taken to them by the company. After customers make their payment, the bank collects it from them on the due date. This financing method is popular among small traders. Large credit terms allow businesses to continue operations without waiting for customers to settle their invoices.
Most companies require their customers to make an advance payment before selling them goods or providing services. The situation is particularly pertinent when dealing with large orders that take a long time to fulfill. It also ensures funds are available to channel into the company’s operations to fulfil the orders.
Selling Goods on Installment:
Companies permit their customers to make payments in installments, especially those selling televisions, fans, radios, refrigerators, and vehicles. Many of these items have now become modern-day necessities; therefore, their customers might not come from well-to-do backgrounds, or the product might be too expensive to pay for immediately. They allow customers to pay regularly throughout the year as an alternative to a large payment at the end. By doing this, the accounts receivable numbers are not clogged up with constant funds coming into the business.