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SOURCES OF WORKING CAPITAL
A large-scale
manufacturing concern taps various
sources to meet its working capital requirements. A company may choose to
finance its current assets by long-term or short-term sources, or a combination of them. Long-term and short-term sources of
working capital have been examined below:
1. Long Term Source or Permanent Working Capital
2. Short Term Source or Temporary Working Capital
Long-term Sources of Permanent Working Capital
The long-term sources of working capital include equity and preference
shares, retained earnings, debentures, and other long-term debts from public
deposits and financial institutions. The long-term or permanent working capital
requirements should be met through long-term sources. The financing of working
capital through long-term sources of funds is generally costlier than that of
short-term sources of funds. However, financing of working capital from
long-term sources provides stability, reduces risk of repayment and increases the liquidity of the business concern. Various long-term sources of working capital
are as follows:
1. Issue of Shares
2. Retained Earnings
3. Issue of Debentures
4. Long-term Debts
Short-term Sources of 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 cost 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.n working capital is given below:
1. Commercial Banks
2. Public Deposits
3. Trade Credit
4. Business Credit Papers
5. Customer's Credit
6. Financial Institutions
7. Government Assistance
8. Indigenous Bankers
9. Depreciation Funds
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