Sources of Working Capital: Short Term | Long Term | Spontaneous Sources

There are multiple Sources of Working Capital available including spontaneous, short term and long term. Each one of them are further categorized into the following:

sources of working capital finance

Spontaneous sources of Working Capital:

  • Sundry Debtor
  • Bills Payable
  • Notes Payable
  • Accrued Expenses

Short Term Sources:

Short term sources of finance definition:

it can be defined as the extra money that a business need to operate its short term activities and run the business on short term basis. there are some common sources through which you can generate your short term financing:

Short term source are further categorized into following:

  • Internal sources
    1. Tax Provisions
    2. Dividend Provisions
  • External Sources
    1. Bank Overdraft
    2. Trade Deposits
    3. Public Deposits
    4. Bills Discounting

Long-Term Sources of working capital

Short term source are further categorized into following:

  • Internal sources
    1. Retained Profits
    2. Depreciation Provision
  • External Sources
    1. Share Capital
    2. Long Term Loans
    3. Debentures

You can also understand this situation with the help of below diagram:

Some main sources of short term finance are bank overdrafts,trade credit, factoring, credit card, lease and bank loans.

Now we will describe each of them as under:

SPONTANEOUS SOURCES OF WORKING CAPITAL FINANCE

This is the first source of Working capital finance. As its names shows that this is a source which always ready and easily available to business in order to operated the business normal activities. The term and condition of the loans are dependent on the relation of the both parties buyer and seller. This source of funding also containing other related credit like sundry credit, bills payable and other accrued expenses etc.Spontaneous Sources of working capital

This loan is very significant to the organization as compared to other financing sources.because of its ‘effortless raising’ and ‘insignificant cost’.

Enlist below there are some spontaneous sources of working capital:

  • TRADE CREDIT
  • SUNDRY CREDITORS
  • BILLS PAYABLE
  • NOTES PAYABLE
  • ACCRUED EXPENSES.

The cost factor and the quantum be subject to the T & C like of such loan that is a maximum limit of the credit, its time period and discount on cash payment. Now its depend upon the supplier how much limit they decide. Normally its depends upon the creditworthiness and the capacity of the business or buyers. Like this the credit period is also defined as 30 days, 45 days etc. if the buyer makes payment immediately on buying material then seller allows the discount.

SHORT TERM SOURCES OF WORKING CAPITAL FINANCE

Short term source of finance can be further categorized on the basis of Short-term internal and external sources:

Short-term Internal Sources

  • TAX PROVISIONS
  • DIVIDEND PROVISIONS

Short-term External Sources

Short-term working capital financing from banks such as

  • BANK OVERDRAFTS,
  • CASH CREDITS,
  • TRADE DEPOSITS,
  • BILLS DISCOUNTING,
  • SHORT-TERM LOANS OR WORKING CAPITAL LOANS,
  • INTER-CORPORATE LOANS,
  • COMMERCIAL PAPER, ETC.

Short Term working capital finance

There are some current liabilities that can’t be delayed like Tax and dividend provisions. The resources which are set for making the payment for these liabilities refers as working capital till the time of payment.

Short term Working capital requires to operate routine activities and can be arrange through different channels like Banking or other financial authorities. As compared to spontaneous working capital sources, the banking channel WC sources are very costly but having a very flexibility of time duration.

LONG TERM SOURCES OF WORKING CAPITAL FINANCING

Long-term sources of financing required to meet the Long-term the need financial activities. These are financed through long term resources. Long tersources are categories into the long term internal sources and long term external sources:

Long-term Internal Sources

  • RETAINED PROFITS
  • PROVISION FOR DEPRECIATION

Long-term External Sources

  • SHARE CAPITAL
  • LONG-TERM LOAN
  • DEBENTURES

long term Sources of working capital

Long-term internal contains Retained profits and provision for depreciation are as good as fund available the business without any implicit or explicit cost. if the organization have sufficient sources it can easily complete its Working Capital Cycle.

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