# Spontaneous Sources of Finance

Spontaneous sources arise naturally in the course of business operations — without the firm having to negotiate them formally each time. They grow and shrink automatically with the level of operations.

## Examples

Trade credit
Credit from employees (accrued wages)
Credit from suppliers of services

## The Three Main Spontaneous Sources

### (i) Trade Credit

Credit extended by the seller/service provider to the purchaser. Contributes about one-third of total short-term financing requirements of a typical firm.

### (ii) Bills Payable

The purchaser gives a written promise to pay the amount of the bill/invoice either on demand or at a fixed future date to the seller or the bearer of the note. This is a formalised version of trade credit, evidenced by a negotiable instrument.

### (iii) Accrued Expenses

Services already availed by the firm for which payment is still pending — wages, salaries, taxes, duties, etc., typically paid at period-end. This is a built-in and automatic source of finance because there is always a gap between service consumption and payment.

Worked example

### Example 1

Q (Nov 23, 4 marks): What are spontaneous sources of finance? Explain the sources.

A: Spontaneous sources arise naturally as business operates. The three principal examples are: (i) Trade credit — credit from suppliers, around one-third of short-term needs; (ii) Bills payable — a written promise to pay on demand or at a fixed future date; and (iii) Accrued expenses — wages, salaries, taxes etc. consumed now but paid at period-end. They cost nothing explicitly and adjust automatically with operations.

⚠️ Common exam mistakes

Listing bank overdraft or commercial paper as spontaneous — these are negotiated short-term sources, not spontaneous.
Forgetting accrued expenses — students often stop at trade credit and bills payable.
Saying spontaneous sources are interest-bearing — they carry only implicit costs, not contractual interest.

Reference:

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