## Short-Term Sources of Finance

### 1. Trade Credit

Credit from suppliers for goods/services purchased
Duration: 15–90 days
No explicit interest; automatically renewed with business volume
Forms: Open account, Bills payable

### 2. Accrued Expenses & Deferred Income

Accrued expenses: Outstanding wages, taxes, interest (payable later)
Deferred income: Advance received for future services
Both are spontaneous sources — arise naturally from business operations

### 3. Advances from Customers

Customers pay in advance for costly or long-lead-time products
Examples: Manufacturing contracts, construction orders
Cost-free finance to the company

### 4. Commercial Paper (CP)

Unsecured promissory note issued by highly rated companies
Denomination: ₹5 lakhs and multiples thereof
Tenure: Short-term
Requires credit rating from CRISIL, ICRA, CARE, or FITCH

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

Short-term Government of India securities
Maturity: 14 to 364 days
Used by the government to manage temporary liquidity

### 6. Certificates of Deposit (CD)

Issued by banks (like time deposits but tradeable)
Maturity: 7 days to 1 year
Tradable in the secondary market (unlike regular FDs)

Instrument	CD	FD
Tradeable?	Yes	No
Issued by	Banks	Banks

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

One company borrows short-term funds from another company that has surplus funds
Tenure: Up to ~6 months
Interest rate varies with amount and tenure

### 8. Public Deposits

Important source of short/medium-term finance
Especially used during RBI's credit squeeze
Maximum: 35% of paid-up capital + reserves
Tenure: Minimum 6 months, maximum 3 years
Unsecured — no collateral
Must not be used for acquiring fixed assets

Worked example

### Example 1

A company buys raw material worth ₹10 lakh on 60-day credit. It sells finished goods in 45 days and collects payment in 30 days (75 days total). Since trade credit extends to 60 days, the company only needs to fund 15 days of the cycle from other sources — trade credit reduces the financing requirement.

### Example 2

A highly rated FMCG company needs ₹50 crore for 90 days. Instead of a bank loan, it issues Commercial Paper at a discount — lower cost than bank interest, and investors get a short-term, liquid instrument.

### Example 3

An investor wants a safe short-term investment. Instead of locking into an FD, she buys a Certificate of Deposit (CD) from a bank. After 3 months (before the 1-year maturity), she sells it on the secondary market — this flexibility is the key advantage over FDs.

⚠️ Common exam mistakes

Stating that Commercial Paper can be issued by any company — only companies with high credit ratings (CRISIL, ICRA, etc.) can issue CPs.
Treating Certificates of Deposit like Fixed Deposits — CDs are tradeable in the secondary market; FDs are not.
Saying public deposits can be used for fixed asset acquisition — public deposits are a short/medium-term source and must not be used for fixed assets.
Confusing ICD with public deposits — ICD is between companies; public deposits are from the general public.

Reference:

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Short-Term Sources of Finance – Trade Credit, CP, T-Bills, CD, ICD, Public Deposits

Worked example

⚠️ Common exam mistakes