Short Term Source

Posted in Finance, Accounting and Economics Terms, Total Reads: 1136
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Definition: Short Term Source

Short term sources of finance are used to meet the day-to-day cash requirements for expenses like purchase of raw materials, payment of wages and other bills. Without cash for these expenses, a company might even be forced to close. It fills the gap in the Cash conversion cycle between Production completion & realization of sales.

The following are various sources of short term finance available for a firm:

  • Trade credit – Provided by suppliers to manufacturers under certain credit terms for speedy recovery of the payments
  • Customer Advances – In case of high value goods, customers are made to pay an advance payment
  • Bank credit – Seeking the help of bank for funds by obtaining short term loans, commercial paper, overdraft
  • Installment credit – A popular method these days where the payments from customers are received in periodic payments
  • Factoring – An expensive method where the accounts receivables are sold to a third party at a discount


Merits

Demerits

  • Can be raised at short notice and there is not much cost involved in the process
  • Can also meet long term source by periodically raising funds

  • Difficulties in raising as much depends upon the credit worthiness of the firm
  • Even for short term source also, interest payments must be made which is another added expense in the P&L


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