Q.Discuss the various short-term sources of finance available to a business.

This essay question asks a student to go beyond trade credit alone and cover the full range of short-term sources studied in this AP Intermediate Commerce chapter.

Short-term sources of finance are funds raised for a period of less than a year, mainly to meet a business's day-to-day working capital needs, and several such sources are commonly used.

Trade credit is the most widely used short-term source: a supplier of goods or raw material allows the buying firm to pay after an agreed interval, commonly thirty, sixty or ninety days, instead of paying cash immediately. It requires no formal agreement or security, expands automatically as a firm's purchases grow, and involves little or no explicit cost as long as payment is made within the agreed period, though delayed payment can cost the firm any early-payment discount and damage its standing with the supplier.

A bank overdraft is a facility under which a current-account holder is permitted to withdraw more than the balance standing in the account, up to a limit sanctioned by the bank, paying interest only on the amount actually overdrawn at any time. Cash credit is a related facility under which a bank sanctions a running credit limit, usually against the security of stock or other current assets, and the borrower draws funds as needed up to that limit, again paying interest only on the amount actually drawn. Short-duration public deposits, short-term bank loans, and bills discounting — where a business obtains immediate cash from a bank against a bill of exchange it holds, at a small discount — are also grouped under short-term finance. …