Explain trade credit and bank credit as sources of short-term finance for business enterprises.

Trade credit is a very simply and convenient method of raising short term finance. No formalities are involved and the credit is reality available to reputed business firms. No interest is payble and no security is to be paid. It is a flexible source of finance as no charge is created against the asset of the company. Trade credit is more economical than bank loans. The suppliers has to bear lossof bad debt in addition to the costs of adminis tering credit Accounts. He requires a larger working capital to supply goods on credit. The buyer losses cash discounts.

2. Bank Credit : Commercial banks serve as the single largest source of short-term finance to business firms. They provide following types of short-term finance :

(a) Outright loans : A loans is direct advance made in lumpsum which is credited to a separate loan A/C in the borrower. The borrower withdraws the full amount in cash immediately and undertakes to repay it in one single instalment. The borrower is required to pay the interest on the whole amount from the date of sanction.

(b) Cash credit : It is a formal and revolving credit agreement under which a borrower is allowed to borrow up to certain limit. Unlike, a loan, it is a running account from which the amounts canbe withdrawn from time to time, subject to the stipulated amount. Cash credit is of two types. When the cash credit is not backed by any security, it is known as clear cash credit.

(c) Line of credit : It is an informal arrangement under which a customer can borrow up to a specified limit. The maximum amount known as the ‘limit’ is determined according to the financial position of the borrower.

(d) Overdraft : It is kind of temporary financial accommodation extended by a bank to its regular customer. Under this arrangement, a customer having a Current A/c. with the bank is allowed to overdraw his account.

(e) Discounting of Bills : This implies procuring cash from a bank in exchange from credit instruments like bills of exchange, Promissory notes and hundies. Banks buy these instruments at prices lower than their face value the difference being the account.