Adequate finance is required to meet the various commitments arising out of business transactions. The financial requirements of business can be broadly classified into two categories, viz., short-term sources and long-term sources. Short-term finance is required to meet the working capital requirements of a business firm. These are the funds required for a period up to one year. The sources of short-term finance are trade credit and bank borrowings. Trade credit refers to the type of credit provided to customers by suppliers of goods in the normal course of business transactions. This is a kind of deferral payments on the part of buyer. It is the most popular type of credit among the traders. Small firms depend on this type of credit heavily as they find it difficult to obtain bank finance. Trade credit is usually granted on an open account basis. This implies suppliers sending goods to the buyers on credit and buyers accepting the same and agreeing to make payment as per the terms and conditions. Trade credit becomes a routine activity between the suppliers and the buyers. Trade links are established between them. The open account credit appears on the buyers balance sheet as sundry creditors. Trade credit also takes the form of bill payables. This happens when the buyer signs and accepts a bill of exchange to evidence the credit sale transaction. A Bill of Exchange recognizes an obligation on the part of buyer. Banks constitute an important institutional source of financing the working capital requirements. Banks consider various aspects such as production and marketing plans of the customer while determining the credit requirements. The amount so determined by the bank is known as credit limit. Bankers are required to fix separate credit limits for various types of credit facilities to be extended to various types of borrowers. |
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