1. Short-term assistance from commercial banks
Short-term funds (for less than a year) mainly finance working capital.
- Overdraft: a current-account holder may draw more than the balance, up to an agreed limit; interest is charged on the amount overdrawn for the period used.
- Cash credit: a borrowing limit against security (hypothecation or pledge of stock, or receivables); the borrower draws and repays within the limit; interest on the amount drawn.
- Short-term loan: a lump sum credited to the borrower's account; interest on the whole amount from the start; repaid in one sum or instalments.
- Discounting of bills: the bank pays the value of an accepted bill before maturity, less a discount, and collects it on the due date.
Merits: flexible; timely; confidential; easy renewal; no dilution of control. Demerits: security and monitoring; uncertain renewal; interest and charges; limits based on the bank's judgement.
| Facility | How it works | Interest on |
|---|---|---|
| Overdraft | Current-account holder draws beyond balance up to a limit | Amount overdrawn, for the days used |
| Cash credit | Borrowing limit against stock or receivables; draw as needed | Amount actually drawn |
| Short-term loan | Lump sum credited to the account at once | Whole amount from the start |
| Discounting of bills | Bank pays bill value before maturity, less a discount | Discount deducted in advance |
| Short-term need (under a year) | Imagined example |
|---|---|
| Buying raw material for a season | A knitwear exporter buys yarn before shipments |
| Paying wages and bills before customers pay | A cable maker waits 60 days for dealers |
| Carrying stock and debtors | A wholesaler stocks rice and pulses for 300 shops |
| For one month (imagined: Kolar Kraft Papers Ltd) | Short-term loan | Cash credit |
|---|---|---|
| Amount on which interest runs | ₹10,00,000 | ₹6,00,000 (average used) |
| Working at 12 per cent a year | 10,00,000 × 0.12 ÷ 12 | 6,00,000 × 0.12 ÷ 12 |
| Interest for the month | ₹10,000 | ₹6,000 |
| Step (imagined: Amravati Auto Parts Ltd) | Working | Result |
|---|---|---|
| Discount for 3 months at 12 per cent | 2,00,000 × 0.12 × 3 ÷ 12 | ₹6,000 |
| Cash received now | 2,00,000 − 6,000 | ₹1,94,000 |
Key terms
- Overdraft
Drawing beyond the balance in a current account up to a limit.
- Cash credit
A secured borrowing limit; interest on the amount drawn.
- Discounting of bills
Getting a bill's value before maturity, less a discount.
2. Public deposits, trade credit and customer advances
Public deposits: deposits a company invites directly from the public for short periods, usually at rates above bank deposits. Advantages: simple procedure; often cheaper than bank borrowing; no charge on assets; no dilution of control; interest is tax-deductible. Disadvantages: short period; only well-known companies can raise them; may be withdrawn in bad times; unsecured for depositors; subject to legal limits and rules.
Trade credit: credit allowed by suppliers on the purchase of goods. Advantages: convenient and continuous; no security; links finance to sales. Disadvantages: may lead to overtrading; limited amount; may cost cash discounts or higher prices.
Customer advances: part of the price paid by buyers before delivery, mainly for made-to-order or scarce goods. Advantages: interest-free; sure sale. Disadvantages: possible only in some businesses; penalties for late delivery; price fixed in advance.
| Public deposits | Points |
|---|---|
| Meaning | Deposits invited directly from the public, usually at a rate above bank deposits |
| For the company | Simple; often cheaper than bank borrowing; no charge on assets; no dilution |
| Against | Short period; only well-known companies can raise them; unreliable in bad times; unsecured for depositors |
| Trade credit | Customer advances |
|---|---|
| Given by suppliers | Given by buyers |
| Firm pays after receiving goods | Firm is paid before delivering |
| Open to almost every business | Mainly for made-to-order or scarce goods |
| Risk: overtrading; lost cash discounts | Risk: penalties for late delivery |
| Imagined firm | Source | Why it fits |
|---|---|---|
| Bundi Bangles (beads on 45 days' credit) | Trade credit | Sells bangles before paying for beads |
| Bharuch Boilers Ltd (30 per cent with order) | Customer advance | Each boiler is made to order |
| Pindari Provisions (ordered too much on credit) | Trade credit misused | Overtrading |
Key terms
- Public deposits
Short-term deposits raised by a company directly from the public.
- Trade credit
Credit allowed by suppliers on purchases.
- Overtrading
Doing more business than the firm's funds can support.
3. Factoring, inter-corporate deposits and instalment credit
Factoring: a financial service in which a factor buys or finances a firm's receivables, advances most of their value at once, collects from debtors and charges a commission. With recourse: the client bears bad debts. Without recourse (non-recourse): the factor bears them. Services: finance against receivables, collection, credit information, sales-ledger maintenance, protection against bad debts. Merits: immediate cash; saves collection effort; credit protection. Demerits: cost; customers may dislike an outside agency; sensitive information shared.
Inter-corporate deposits (ICDs): unsecured short-term deposits placed by a company with surplus funds in another company. Kinds: call deposits (withdrawable at short notice), three-month and six-month deposits. Merits: quick, few formalities. Demerits: often costly; uncertain; risky for the lender.
Instalment credit: the buyer pays a down payment and the balance with interest in instalments, using the asset meanwhile. Under hire purchase, ownership passes on the last instalment. Merits: use without full payment. Demerits: interest cost; risk of repossession.
| Step (imagined: Mysuru Silk House) | Working | Result |
|---|---|---|
| Advance at 80 per cent | 10,00,000 × 0.8 | ₹8,00,000 |
| Commission at 2 per cent | 10,00,000 × 0.02 | ₹20,000 |
| Cash received now | 8,00,000 − 20,000 | ₹7,80,000 |
| Inter-corporate deposits | Points |
|---|---|
| Meaning | Unsecured short-term deposits by a company with surplus cash in another company |
| Kinds | Call deposits (short notice), three-month and six-month deposits |
| For the borrower | Quick, few formalities, no security |
| Against | Often costly; uncertain availability; risky for the lender as unsecured |
| Step (imagined: Bastar Bell Metal Crafts) | Working | Result |
|---|---|---|
| Down payment at 20 per cent | 9,00,000 × 0.2 | ₹1,80,000 |
| Balance | 9,00,000 − 1,80,000 | ₹7,20,000 |
| Flat interest, 10 per cent for 2 years | 7,20,000 × 0.1 × 2 | ₹1,44,000 |
| Monthly instalment | (7,20,000 + 1,44,000) ÷ 24 | ₹36,000 |
| If the firm… | A suitable short-term source |
|---|---|
| has a current account and a few days' gap | Overdraft |
| carries seasonal stock | Cash credit against stock |
| holds customers' accepted bills | Discounting of bills |
| sells on open credit to many buyers | Factoring |
| makes goods to order | Customer advances |
| belongs to a group with spare cash | Inter-corporate deposit |
| needs an asset it cannot pay for at once | Instalment credit |
Key terms
- Factoring
Selling or financing receivables through a factor for a fee.
- Non-recourse factoring
The factor bears bad debts.
- Inter-corporate deposit
Unsecured short-term deposit by one company with another.
- Down payment
The part of the price paid at purchase under instalment credit.
Exam tips
Common mistakes
- Saying interest on cash credit is charged on the full limit.
- Recommending public deposits or ICDs for long-term projects.
- Mixing up trade credit (from suppliers) and customer advances (from buyers).
- Saying factoring is free, or forgetting recourse when bad debts are mentioned.
How marks are usually awarded
- 1 mark: correct option, term or figure.
- 2–3 marks: source named, explained and linked to the firm; or bases of distinction for both sides.
- 5 marks: parts answered separately; merits and demerits balanced; calculations step by step.