Let us discuss the sources of Financing working capital one by one:
Trade credit
Text refers to an arrangement where by the supplier of raw material, components, stores and spares parts ,finished goods, allow the customers to pay their outstanding balances within the credit period allowed by them. Generally suppliers grant credit for period of 3 to 6 months and thus provide certain funds to finance current assets .The availability of trade credit depends upon various factors such as nature and size of firm ,status of the firm,activity level of the firm policy of trade credit suppliers ,prevailing economic conditions etc. Trade credit may be allowed in the shape of open account of bills payable.The major advantage of trade credit include ready availability ,absence of issue formalities etc. The major limitation trade credit is that it involves loss of cash discount which could be earned if payments were made within 7 to 10 days from the date of purchase .This loss is regarded has cost of trade credit.
Advance from customers
Advance from customers also actors source of short term finance. The availability of advances from customers depends upon various factors such as type of goods,elasticity of demand and creditworthiness of supplier etc.
Discounting bills of exchange
When goods are sold on credit the suppliers generally draw bills of exchange upon customers who are required to accept the same. The terms of Bills of exchange maybe 3 to 6 months. Instead of holding the bills till the date of maturity , companies generally prefer to get them discounted with the bank .Discounting Bills of exchange refers to an act of selling of a bill to obtain payment for it before its maturity . The bank charges discount in terms of interest for unexpired term on the bill . The bank credits cthe net proceeds to the account of customer . on the date of maturity of the bill ,presents the bill before the acceptor of the bill for payment and receives the full amount of the bill. If the bank does not receive the payment from the acceptor ,it is known as the dishonour of a bill. Bank returns the Dishonored bill to the company and debits Dto the account of the company. The cost of raising finance by this method is the discount charged by the bank
Trade credit
Text refers to an arrangement where by the supplier of raw material, components, stores and spares parts ,finished goods, allow the customers to pay their outstanding balances within the credit period allowed by them. Generally suppliers grant credit for period of 3 to 6 months and thus provide certain funds to finance current assets .The availability of trade credit depends upon various factors such as nature and size of firm ,status of the firm,activity level of the firm policy of trade credit suppliers ,prevailing economic conditions etc. Trade credit may be allowed in the shape of open account of bills payable.The major advantage of trade credit include ready availability ,absence of issue formalities etc. The major limitation trade credit is that it involves loss of cash discount which could be earned if payments were made within 7 to 10 days from the date of purchase .This loss is regarded has cost of trade credit.
Advance from customers
Advance from customers also actors source of short term finance. The availability of advances from customers depends upon various factors such as type of goods,elasticity of demand and creditworthiness of supplier etc.
Discounting bills of exchange
When goods are sold on credit the suppliers generally draw bills of exchange upon customers who are required to accept the same. The terms of Bills of exchange maybe 3 to 6 months. Instead of holding the bills till the date of maturity , companies generally prefer to get them discounted with the bank .Discounting Bills of exchange refers to an act of selling of a bill to obtain payment for it before its maturity . The bank charges discount in terms of interest for unexpired term on the bill . The bank credits cthe net proceeds to the account of customer . on the date of maturity of the bill ,presents the bill before the acceptor of the bill for payment and receives the full amount of the bill. If the bank does not receive the payment from the acceptor ,it is known as the dishonour of a bill. Bank returns the Dishonored bill to the company and debits Dto the account of the company. The cost of raising finance by this method is the discount charged by the bank
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