Funds require to meet day to day operations are called short term finance. It is also called working capital. Temporary working capital is termed as short term. Some of them are as follows −
The credit, which extended by manufacturer in producing its product is called trade credit. In this period, the purchaser has a debt outstanding to supplier as payment became due.
In buyer balance sheet, it is recorded as creditors and in supplier balance sheet, it is recorded as debtors. New and small firms will depend more on trade credit.
Accrued expenses generally refers to services availed by the firm, but payment is not paid. These expenses are interest free source of finance.
Commercial paper is note issued by a firm to raise funds for a shorter period of times. It is a money market instrument. Commercial papers are unsecured promissory notes.
Unsecured firms with good credit rating can only issue commercial papers. The main advantage of commercial papers is that the cost involved is lower than the prime lending rates.
In short, it is written as ICDs. These are unsecured and are arranged by a financier.
These are not covered by section 58A of companies Act 1956. Interest rates on ICDs varies depending on amount and time.
Rate of interest in this type, may be higher than the long term. Only established companies can issue short term unsecured debentures.
Bank credit is intended to carry the firm through seasonal peaks in financing need.
Types of bank credits are overdraft, cash credit, bills purchases and bills discounting, letter of credit, working capital term loan, funded interest term loan.