Short-term finance is required to match the current requirements of business. The present needs can include payment of taxes, salaries or wages, repair expenses, payment to creditor etc. The requirement for temporary finance arises because sales revenues and buy payments aren’t perfectly same at the time. Sometimes sales could be low when compared with purchases. Further sales might be on credit while purchases take presctiption cash. So temporary finance is required to match these disequilibrium.
Causes of temporary finance are listed below:
(i) Bank Overdraft: Bank overdraft is extremely broadly used supply of business finance. Under this client can draw certain amount of cash in addition to his original balance. As a result it is simpler for that businessman to satisfy temporary unpredicted expenses.
(ii) Bill Discounting: Bills of exchange could be discounted in the banks. This gives cash towards the holder from the bill that you can use to invest in immediate needs.
(iii) Advances from Customers: Advances are mainly required and received for that confirmation of orders However, forms of utilized as supply of financing the operations essential to execute the task order.
(iv) Installment Purchases: Purchasing on installment gives additional time to create payments. The deferred payments are utilized as an origin of financing small expenses which should be compensated immediately.
(v) Bill of Lading: Bill of lading along with other export and import documents are utilized like a guarantee to consider loan from banks which amount borrowed can be used finance for a short while period.
(mire) Banking Institutions: Different banking institutions also aid businessmen to get away from financial hardships by supplying short-term loans. Certain co-operative societies can arrange temporary financial help for businessmen.
(vii) Trade Credit: It’s the usual practice from the businessmen to purchase raw material, store and spares on credit. Such transactions lead to growing accounts payable from the business which should be compensated following a certain period of time. Merchandise is offered on cash and payment is created after 30, 60, or 3 months. This enables some freedom to businessmen in meeting financial hardships.