Source of Short Term Finance,Source of Short Term Finance
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7/13/2019 Source of Short Term Finance,Source of Short Term Finance
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Source of Short Ter
Finance
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Short Term Finance
Borrowing or lending of funds for a short period of time.
Usually one year or less in duration.
Short term finance is secured for financing the current ass
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Bank Overdraft
Treasury bill(T-Bill) Trade Creditors
Customers Advances
Finance Companies
Commercial Paper
Certificate of Deposit
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Bank Overdraft
Overdraft is a temporary facility that bank provides to its customers in
which the customer is permitted to draw money from banks in excess o
the balance in their bank accounts.
You are charged interest based on the amount overdrawn and the
length of time overdrawn.
AdvantagesFlexible,Quick
DisadvantageCost,Recall
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Customers Advances
Customers often finance the seller through advance payment forthe goods.
The prices of the goods to be purchased are paid in advance, i.e.before the receipt of the goods.
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Trade Creditors
Trade creditors are probably the most important single source of
short term credit. Trade creditors are those business establishmentswhich sell good to others on credit. That is, they do not requirepayment on the spot; rather they are to be paid after some daysfrom the date of sale.
Credit granted to manufactures and traders by the suppliers of raw
materials.
Usually for 30-90 days.
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Treasury bill(T-Bill)
Short Term Government Security
They are promissory Notes issued at discount and for a fixed period
Central\State Govt. (RBI)
First issued in India in 1917
Usually sold at auction on discount basis.
Maturity 91- 364 days
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Sold to Public & Banks
Risk is Low.
Yield is lower than on other securities.
Treasury NotesLong term 1- 10 yrs.
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Commercial Paper
It is an Unsecured money market instrument issued in the form of apromissory note.
Introduced in India in 1990
It was introduced in India with a view to enabling highly ratedcorporate borrowers to diversify their sources of short term borrowinand to provide an additional instrument to investors.
Who can issue
Corporates
Primary Dealers(PDs)
All India Financial Institutions
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Commercial papers are a form of short-term borrowing facility withmaturities from seven to 364 days.
Companies can thus obtain unsecured finance directly from investors.Bypassing banks and bond markets, although banks are often used asagents to place the paper.
Who can Invest
Indiviuals,banking companies, other corporate bodies
Requirements
Credit Rating Serviice (CRISIL) minimum credit A-2
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Period of Maturity
7-1yr
There is no collateral on the debt,Commerical paper is only anoption for large companies having high level credit rating fromrecognised credit rating agency (S&P).
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Commercial Banks
The commercial banks of a country generally supply funds to thebusiness concerns on a short-term basis.
Either with security or without security if the customer is financiallyestablished.
The banks, collecting scattered savings of the people, invest aportion of the deposits in the business for a short period of time.
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Certificate of deposit (CD)
Similar to savings account
CDs are a form of time deposit
A certificate of Deposit is a relatively low risk debt instrumentpurchased directly through a commercial bank of savings and loaninstitution.
CD indicates that the investors has deposited a sum of money forspecified rate of interest.
CDs are not publicly traded securities.you can purchase CDsthrough a stockbroker. Issued by Bank.
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Interest on CDs not exempt from States and local taxes.
You can look but cant touch before maturity.
Higher rates of return
Money removed subject to penalty.
3 Months7yrs
Banks have to maintain appropriate reserve requirement (CRR)
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Types of CDs
Traditional CD - receive fixed interest rate over a specific period oftime.(Half penalty)
Bump-Up CDAllows you to swap your CDs interest rate for ahigher one if rates on new CDs of similar duration rise during yourinvestment period.
Liquid CDAllows to withdraw part of your deposit without paying
penalty.
Callable CDBank that issues this type can recall it after assetperiod.
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Factors or Brokers
In one basic respect, factoring is different from other forms offinancing. In other forms funds are granted to one individual largelyon the basis of his property. Factoring is based on a differentphilosophy.
In considering a companys request for funds we are more
interested in the men behind the company their ability, their hopesand aspirations for the future.
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Miscellaneous Sources
There are many more sources from which can secure funds for shorperiod. They arefriend and relatives, public deposits, loan fromofficer and the company directors and foreign exchange banks
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THANK YOU
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