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SHORT-TERM SOURCE OF WORKING CAPITAL OR TEMPORARY WORKING CAPITAL
Temporary or variable working capital is needed for meeting the short-term
or seasonal needs of current assets. The variable working capital should be
financed from short-term sources of funds and only for the period needed. The
financing of working capital through short-term sources has the benefits of
lower costs and establishing close relationships with the banks. Short-term
financing of working capital funds also provides flexibility to the firm,
particularly when the need for current assets is cyclical or seasonal. The
short-term sources of financing the variable working capital requirements are mainly
banks, public deposits, depreciation credit, credit papers, loans from
directors, and government assistance. A brief description of each of these
sources of short-term working capital is given below:
Commercial Banks:
Commercial banks constitute a significant source of short-term or temporary working capital. Normally
companies obtain short-term working capital from these funds in the form of
short-term loans, cash credit, overdrafts, and through discounting the bills of
exchange.
Public Deposits:
Public deposits is another important source
of financing the short-term working capital requirements of a business concern.
Most of companies in recent years depend on this source to meet their
short-term working capital requirements ranging from six months to three years.
The company's (Acceptance of Deposits) Rules authorize a company to raise funds equal to 25% of its paid-up
share capital and free reserves through public deposits.
Trade Credit:
Generally, trade credit is a widely tapped source
of short-term financing for the working capital needs of almost every business
concern. Under this arrangement, trade creditors or the suppliers of goods,
inventories, and equipment provided short-term finance to the company on the
basis of deferred payments of their supplies.
Business Credit Papers:
Business credit papers such as bills
of exchange, promissory notes, etc., are also important sources of working
capital. The acceptor of a bill of exchange gets the time for making the
payment of goods purchased on the basis of deferred payment. It serves as a
short-term credit extended by the creator against the acceptance of the acceptor.
The same purpose is served by a promissory note also.
Customers Credit:
Advances from customers against the
contracts entered into by the concern also constitute a source of short-term
working capital. Advances from customers are generally asked for by companies having a long production cycle, e.g., shipbuilding industry.
Financial Institutions:
Financial institutions, such as--Investment
Companies, Life Insurance Corporations, Unit Trust of India, etc., are also an
important source of working capital.
Government Assistance:
Central, as well as state governments, also provide short-term financial assistance to business concerns by allowing
them tax concessions and granting loans.
Indigenous Bankers:
Indigenous Bankers' Short-term working
capital requirements of business concerns in India are also financed by indigenous bankers, which have recently taken the form of finance companies.
Loan from Managing Director and Directors:
Sometimes, the managing director and director also provide short-term working capital to the company in the form
of a loan at a negligible rate of interest.
Depreciation Funds:
The depreciation funds created out of
the company's profits also provide a reliable source of working capital so long
as they are not invested in assets or distributed as dividends.
Provisions for Taxes:
There remains a time lag between making
provisions for taxes and their actual payment. Thus, the funds provided for
taxation can be utilized for the short-term working capital requirements of the
company during the intermittent period.
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