Question

Identify six sources of short term financing available in financing new business and give detailed explanation as to the process involved and how each of them is used in obtaining required financing.

Answer 1

The six sources of financing that is available to the new businesses are:

a) Trade credit: The trade credit is provided to the new businesses so that they can use the money to buy raw materials, labour etc. The payment for these can be done at a later date.

b) Credit from banks: The banks provide credit to the new businesses so that they can support their businesses. It can be in the form of bank loans or overdraft facility to the owner of the business.

c) Advances: New businesses may take advances from banks, money lenders etc. The amount ca be used to develop the business.

d) Factoring: This is the process by which a financial institution offers services relating to financing of debts arising out of credit sales. Factoring has become popular all over the world and it can be offered by specific institutions which have been dealing with it.

e) Account overdraft facility: Banks may help the new business to start by providing them with overdraft facility in the current account of the business.

f) Customer's advances: Customers may also give acertain amount of money to the business so that ir can start functioning smoothly.

The above mentioned sources of short term finance can be obtained from banks. The banks will first study the business of the company and then decide whether the institution should go ahead and help the business or not. The credit worthiness of the business and their credit cycle or time period will be studied to ensure that the business is runing smoothly.