Short term finance refers to financing needs for a small period normally less than a year. In businesses, it is also known as working capital financing. This type of financing is normally needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory, accounts receivables etc. At times, only specific one time orders of a business are financed.
One of the major function of financial manager is to provide financing for all the financial requirements of the company. Financial requirements are either short term or long term. The long term requirements are fulfilled to long term debt or corporate bonds.
The short term Financial requirements of the company are generated from the following resources that are available to the company.
- Spontaneous financing
- Negotiated Financing
Spontaneous Financing is the financing available to the business in off and on modes. Spontaneous financing is provided by Account payable, short term credit from suppliers, accrued expenses.
Negotiation of financial documents. The nature of financial documents is such that it can either be handed over to another person easily or it cannot be transfer to another person easily. Claim to an asset represented by a document is called a financial asset or a document. For example, currency notes in your pockets are claimed to be asset.
Negotiation of financial documents mean that some financial document; a document which represent a claim to an asset is called financial document, transfer a financial document without any documentation and without any defect of title is called Negotiation of financial document.
This word negotiation has given birth to the term negotiation financing.
The following types of negotiated financing are available in the market; these are also called money market instruments.
- Commercial papers
- Letter of Credit
- Banker’s acceptance.
December 04, 2019