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Friday, December 9, 2022

Sources of short-term business finance

By Funso Dare
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There are diverse sources of finance. We have short-term, Medium-term, and Long-term sources of finance. We would first of all examine the sources of short-term business finance in this write-up. Traditionally, sources of business financing that are available within one year or so are referred to as short-term sources of finance.

A major source of short-term business finance is Trade Credit. This involves the act of selling goods on credit. The investor that needs short-term finance arrange for credit by placing an order with any one of its main suppliers, if it happens that the supplier in question is satisfied with the investor’s credit, the goods would be released.

Thereafter, the investor can now arrange to pay for the goods in line with the supplier’s pre-arranged credit terms. The unique terms of trade credit sometimes include cash discount, trade discount or quantity discount. The seller may offer a cash discount if the credit is settled during the early part of the agreed period.

It may be specified as 2/10 net 30 or 3/15 net 60 which indicates that if the investor is able to pay within the first 10 days, he would be offered a two percent discount or else pay the full amount on or before the 30th day in that first instance while in the latter, the investor would be offered a three percent discount if he pays within the first 15 days or pays the full amount on/or before the 60th day. Cash discounts are normally given as an encouragement or incentive for buyers to pay early.

Trade discount however is a type of credit term which allows for preferential treatment of buyers. In trade discount, the seller charges one type of customer a lower price may be a wholesaler while he charges another type of customer, say a retailer, a higher price. On the other hand, quantity discount is a kind of credit term that attaches discount to a specific quantity of goods bought. The seller can offer a certain percentage of discount to buyers who buy goods above a certain amount. For instance, the seller can offer a five percent discount to buyers who buy over a thousand cartons of goods in stock. This is usually given as an incentive for buyers to buy in bulk.

Another popular source of short-term business finance is Bank Credit. Most Deposit Money Banks (DMBs) in Nigeria lends on short-term basis. Bank Credit is usually a short-term loan granted to bank customers whose loan applications are successful. Bankers, after careful scrutiny of loan applications, bearing in mind the canons of good lending normally ensures that the loan is secured with collateral or a combination of more than one acceptable collaterals. Bank short-term loans are not supposed to be utilized for long-term projects or for permanent financing of firms. Because of this, most banks require their credit customers to clean-up or pay up their short-term loans at periodic intervals. Bank Credit can come in the form of an advance, overdraft or term loans.

Advances are short-term loan by a bank for a specific purpose whereby the repayment source is known at the time of the advance. For instance, a bank may grant a customer few thousands of naira for a specific purpose in anticipation of the customer’s salary domiciled in the bank which would be paid in about two weeks. An overdraft is a form of loan granted to bank customers who are current account holders. In literal terms, the customer is allowed to “overdraw” his account, that is, the customer is allowed to draw cheques far more than what stands as the credit balance in the customer’s account. Overdrafts are normally granted to business customers in other to meet working capital requirements. A specific authorised limit would be set for the overdraft while interest would be charged on the amount overdrawn.  Term loans on the other hand is a lump sum granted to a bank customer for a specific project. The loan has a repayment schedule which might be on a monthly basis, quarterly, semi-annually or even annually.

Commercial papers are viable source of short-term business finance also. Commercial papers are recognised as promissory notes which are issued by reputable blue-chip companies to borrow short-term funds from the general public. The performance and reputation of the company is all that is really required. Companies quoted on the first-tier securities market of the Nigerian Stock Exchange (NSE) are the main participants in the commercial paper market. Commercial papers are usually not collaterised but some commercial papers could be secured by stocks of goods.

In Nigeria, the most prominent source of short-term business finance is bank credit. However, most Nigerian investors often miss-match this short-term bank finance by using it to fund long-term projects which makes repayment of the borrowed funds an uphill task.

The Hope Owena Press
The Hope Owena Presshttp://www.thehopenewspaper.com
Owena Press Limited (Publisher of The Hope Newspaper), Akure

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