The short-term fund is required to accomplish the current needs of the company. The current requirements may incorporate payment of taxes, salaries, maintenance expenses, payment to the lender, etc. The need for temporary finance appears due to sales profits, and purchase payments are not quite the same. Occasionally sales can be low as contrasted to investing. Further sales may be on the loan while purchases are on cash. So short term loan is required to match this disequilibrium.
Resources of short term finance are as follows:
(i) Bank Overdraft: Bank overdraft is a very commonly utilized source of company finance. Under this user can draw a particular sum of money over and above his initial account balance. Therefore it is convenient for the entrepreneur to meet short term unexpected payments.
(ii) Bill Discounting: Bills of exchange can be reduced at the banks. This offers cash to the owner of the bill, which can be used to loan for immediate needs.
(iii) Advances from consumers: Advances are demanded and obtained for the verification of orders. However, these are also utilized as a source of funding the operations necessary to perform the job order.
(iv) Installment Purchases: buying on installment provides extra time in paying money. The deferred cash is used as a source of funding small expenses that are to be paid instantly.
(v) Bill of Lading: Bill of lading and other trade and import documents are used as a guaranty to take a loan from banks, and that loan amounts can be used as a fund for a short time.
(vi) Economic associations: various financial institutions also assist entrepreneurs in getting out of financial hardships by providing short-term loans. Specific co-operative organizations can arrange short term financial help for business people.
(2) Medium Term Finance:
This fund is required to match the medium term (1-5 years) necessities of the business. Such a budget is fundamentally necessary for the balancing, evolution, and replacement of equipment and plant. These are additionally required for the re-engineering of the company. They help the administration in finishing medium term capital projects within schedule. Following are the options of medium-term finance:
(i) Commercial Banks: Commercial banks are the primary source of medium-term financing. They offer loans for different time-period against ideal securities. At the termination of terms, the fund can be re-negotiated if needed.
These are different sources of finance. There is no complicated and fast principle to differentiate among short and medium term sources or medium and long term resources. A source, for example, commercial banks can offer both short term or long term financing regarding the requirements of the customer. However, all these sources are usually used in the modern business community for raising funds.