Short Term Financing

Posted in Finance, Accounting and Economics Terms, Total Reads: 868
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Definition: Short Term Financing

The various methods of short term financing are:

  • Cash credit – Cash credit, also known as working capital credit, is a short term (generally 1 year) loan given to businesses to fulfill the need of their working capital requirement for the budget year. Security is normally kept by bank so as to secure the loan. The company can continuously withdraw cash from the bank but up to a certain cash credit limit sanctioned by the bank. This credit limit is set by the working capital requirements minus the margin which a company funds by itself. Other factors which determine credit limit are stock and bond value, history of repayment lapse, schedule of repayment, etc.

 

  • Packing credit – Packing credit, also known as pre-shipment credit, is a part of export credit provided to exporters to help then in procuring raw materials, manufacturing and packaging goods and transporting them outside the country, given pre-shipment. The repayment time is 90 days and the rate of interest is lower as compared to cash credit. In order to get this loan, it is necessary for the exporter to obtain a letter of credit in his favor by an over buyer or a confirmed and irrevocable order for the export of goods or any other related evidence.

 

  • Bank overdraft – Bank overdraft is the facility provided by the banks wherein one can withdraw money from his account even after the balance has reached zero. Any negative balance is charged interest which is lower than cash credit, but up to a certain limit. Beyond a particular negative limit, pre defined fees is charged. This allows banks to process checks which otherwise would have bounced due to low balance.
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