By; Ravichandra.K.S .

Sources of Finance
Trade Credit
Accrued Expenses and Deferred Income Bank Borrowings

Factoring of receivables
Commercial Paper

Trade Credit and Credit Terms

Refers to the credit that the customer gets from

supplier of goods in normal course of business. An informal arrangement, granted on an open account basis, not formally acknowledge as a debt. Trade credit may also take the form of bills payable. Credit Terms refers to the conditions of due date and cash discount.

Benefitas and Costs of Trade Credit

1. 2. 3.

Benefits
Easy Availability. Flexibility. Informality.

1.

Costs
Implicit Cost.

ACCRUED EXPENSES AND DEFERRED INCOME

Accrued Expenses
for the services which it has already received. 1. Accrued Wages and Salaries. 2. Accrued taxes and Interest.

Accrued expenses represent a liability that a firm has to pay

Deferred Income
goods and services which it has agreed to supply in future. 1. Advance Payments.

Deferred income represents funds received by the firm for

Regulation of Bank Finance

Dehejia Committee (1968) Tandon Committee (1974) Chore Committee (1979)

In the deregulated economic environment in India recently, banks have considerably relaxed their criteria of lending. In fact, each bank can develop its own criteria for the working capital finance.

Bank Finance for Working Capital

Overdraft
Cash Credit Purchase or Discounting of Bills

Letter of Credit
Working Capital Loan

Dehejia CommitteeExisting Deficiencies

It is the borrower who decides how much he would borrow;

the banker does not decide how much he would lend and is, therefore not in a position to do credit planning.

The bank credit is treated as first source of finance and not

as supplementary to other source of finance.

The amount of credit extended is based on the amount of

security available, not on the level of operations of borrower. all bad and sticky advances are secured advances; safety essentially lies in the efficient follow-up of the industrial operations of the borrower.

Security does not by itself ensure safety of bank funds since

The Tandon Committee-Notions

Operating Plan Production Based Financing Partial Bank Financing

The Chore CommitteeRecommendations

Reduced Dependence on Bank Credit. 2. Credit limit to be separated into peak level and normal non-peak level limits. 3. Existing Lending System to Continue. 4. Information System.
1.

COMMERCIAL PAPER
Unsecured promissory notes issued by firms to raise

short-term funds. In India, it was introduced in 1989 on recommendation of the Vaghul Working Group. Commercial papers sell at a discount from face value.

Thank you