## Short-Term Sources of Finance

Short-term finance meets working capital requirements — typically for periods under one year.

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### 1. Trade Credit

Credit extended by suppliers for goods/services purchased
Typical duration: 15–90 days
No explicit interest (cost is foregone cash discount)
Auto-renewed with business activity
Forms: Open account (most common) or Bills payable
Most spontaneous source — grows automatically with purchases

### 2. Accrued Expenses & Deferred Income

Accrued expenses: Outstanding wages, taxes, interest payable — owed but not yet paid
Deferred income: Advance received for services not yet rendered
Both are spontaneous, interest-free short-term finance

### 3. Advances from Customers

Customers pay in advance for costly or long-lead-time products
Examples: manufacturing contracts, construction projects
Essentially cost-free finance for the company

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### 4. Commercial Paper (CP)

Unsecured promissory note issued by highly-rated companies only
Denomination: ₹5 lakhs and multiples thereof
Short tenure (few weeks to months)
Requires credit rating from: CRISIL, ICRA, CARE, FITCH
Issued at a discount; investors earn by buying below face value

### 5. Treasury Bills (T-Bills)

Short-term Government of India securities (risk-free)
Maturity: 14 to 364 days
Issued at discount; face value paid at maturity
Used by government to manage temporary liquidity gaps

### 6. Certificates of Deposit (CD)

Issued by banks — like time deposits, but tradeable in secondary market
Maturity: 7 days to 1 year
Key distinction: CDs are tradeable; regular FDs are not

### 7. Inter-Corporate Deposits (ICDs)

One company borrows from another company with surplus funds
Short-term: typically up to 6 months
Interest rate varies with amount and tenure (negotiated)

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### 8. Bank Advances — Types

Type	Key Feature
Short-Term Loan	Disbursed in full at once; repaid in lump sum or installments
Overdraft	Allows withdrawal beyond account balance up to a fixed limit
Clean Overdraft	Overdraft given without security to trusted/creditworthy parties
Cash Credit	Credit limit used as per need; interest charged only on amount utilized
Advance Against Goods	Against security of stock — via pledge or hypothecation
Bills Purchased/Discounted	Finance against bills of exchange; bank holds bills as security

> Cash Credit vs Overdraft: Cash Credit is against stock security (hypothecation/pledge); Overdraft is against the current account balance limit.

Worked example

### Example 1

A retailer buys goods worth ₹10 lakh from a supplier on 60-day credit terms. No cash changes hands immediately — the supplier has financed the retailer for 60 days at no explicit cost. This is trade credit: spontaneous, zero-cost, and auto-renewed each purchase cycle.

### Example 2

Infosys issues Commercial Paper worth ₹500 crore at a 7.5% annualized discount rate for 90 days. A mutual fund buys the CP at ₹98.15 lakh per ₹1 crore face value. On maturity, Infosys pays ₹1 crore — the difference (₹1.85 lakh per crore) is the investor's return. Infosys benefits from cheaper funds than a bank loan.

### Example 3

A company has ₹50 lakh in its current account and is sanctioned a ₹20 lakh overdraft limit. It can draw up to ₹70 lakh (balance + overdraft). It uses ₹5 lakh of overdraft for 10 days — interest is charged only on ₹5 lakh for 10 days, not on the full ₹20 lakh limit. This demonstrates the overdraft facility.

⚠️ Common exam mistakes

Stating Commercial Paper can be issued by any company — only companies with a HIGH credit rating (rated by CRISIL/ICRA/CARE/FITCH) can issue CP; it is unsecured, so creditworthiness is critical.
Confusing Cash Credit interest with Overdraft interest — in Cash Credit, interest is charged only on the amount actually utilized, not the sanctioned limit; same for Overdraft.
Confusing CD (Certificate of Deposit) with FD (Fixed Deposit) — the key difference is that CDs are TRADEABLE in the secondary market, while regular FDs are not.
Confusing T-Bills (government instruments) with Commercial Paper (corporate instruments) — T-Bills are government securities with no default risk; CP is corporate, unsecured, and carries credit risk.
Thinking accrued expenses are a cost — they represent money owed but not yet paid, so they are a FREE source of short-term finance until the payment due date.

Reference:

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Short-Term Sources of Finance — Trade Credit, Commercial Paper, T-Bills, Certificates of Deposit, and Bank Advances

Worked example

⚠️ Common exam mistakes