SHORT TERM FINANCING
Uploaded by ddscoolz on Feb 22, 2013
SHORT TERM FINANCING
Short term financing helps to increase the inventory and many of short term financing ends below 180 days. The cycle of cash is begins with purchase of inventory, manufacturing process, production of goods, sale of goods for cash or credit so that increase of debtors or cash will be available. The organization assets are formed with fixed assets and current assets whereas the fixed assets are financed by the long term financing. In case of current assets, short term financing is most suitable.
The capital equipments or fixed assets are met by the long term finance i.e. may be more than one year. Therefore most of the business transactions for day to day depends upon the short term needs. It is more important that short term cash invested in inventory must be realized to cash through sale of products without delay and the faster rate should be more than accounts receivables.
Short term financing can also get through bank loans, working capital loans, certificate of deposits etc. In case of higher short term financing, the organization can issue higher denomination of certificate of deposits. Short term bank loans may offer higher rate of rate of interest and certificate of deposit scheme involves providing mortgaged guarantee by the organization. Therefore most of the organizations show interest to get Working capital through banks as short term finance. Getting of the working capital as short term finance depends upon the eligibility norms of the organization. The calculation of working capital is a difference between the current assets and current liabilities. If the current liabilities exceed the current assets, it will be problem for the organization to get the Working Capital as Short term financing. Even there is much difference exists over current liabilities, still MPWC i.e. maximum permissible working capital is allowed 75% of excess of current assets over current liabilities.
While searching for short-term financing alternatives, Factoring is an option to consider as short term financing. The factoring allows selling the accounts receivables or invoices at a discount known as factor. For example if the organization has an amount of $500,000 as Accounts receivable, can sell at 15% discount so that factor agency can pay the 85% of $500,000. In such case there will be no risk of bad debts and immediate cash available without waiting. Hence it is one type of short term financing which most advantage and advanced short...