Finances are what make business possible. To keep all of the promises that come out of business transactions, you need enough money. There are two main ways for a business to get the money it needs: sources for the short term and sources for the long term.
For a business to meet its working capital needs, it needs short-term financing. This is the amount of money needed for up to a year. Short-term financing comes from trade credit, bank loans, factoring of receivables, commercial paper, and expenses and income that have already been paid for but not yet received. Trade credit is a type of credit that is given to customers by the people who sell them goods as a normal part of doing business. The trade credit is easy to get and depends on how well the seller and the buyer know each other. It also makes it easier for small and new businesses to buy goods because they can buy them on credit.
Banks are an important source of institutional financing for working capital needs. When figuring out a customer's credit needs, banks look at things like how they plan to make things and sell them. The amount that the bank says you can borrow is called your "credit limit." Bankers have to set different credit limits for the different kinds of loans they give out to different kinds of borrowers. Before giving money, the banker looks at the margins. This is based on the idea of conservatism, and it has been decided to keep funds safe.
Customers can get the following kinds of financial help from banks: Overdrafts, Cash Credits, Bills Bought or Discounted, and Demand Loans. Overdraft is a temporary arrangement in which the customer is allowed to take out more money than what is in their account. Under the cash credit facility, a borrower can take out money from the bank up to the amount of money that has been approved. Demand loans are called "ad hoc" or "temporary" loans because they are given to customers to help them pay for unplanned expenses. When someone takes out one of these types of advances, they have to pay a higher rate of interest.
