Temporary or variable working capital is needed for meeting the short-term or seasonal needs of current assets. The variable working capital should be financed from short-term sources of funds and only for the period needed. The financing of working capital through short-term sources has the benefits of lower costs and establishing close relationships with the banks. Short-term financing of working capital funds also provides flexibility to the firm, particularly when the need for current assets is cyclical or seasonal. The short-term sources of financing the variable working capital requirements are mainly banks, public deposits, depreciation credit, credit papers, loans from directors, and government assistance. A brief description of each of these sources of short-term working capital is given below:


Commercial Banks:

Commercial banks constitute a significant source of short-term or temporary working capital. Normally companies obtain short-term working capital from these funds in the form of short-term loans, cash credit, overdrafts, and through discounting the bills of exchange.


Public Deposits:

Public deposits is another important source of financing the short-term working capital requirements of a business concern. Most of companies in recent years depend on this source to meet their short-term working capital requirements ranging from six months to three years. The company's (Acceptance of Deposits) Rules authorize a company to raise funds equal to 25% of its paid-up share capital and free reserves through public deposits.


Trade Credit:

Generally, trade credit is a widely tapped source of short-term financing for the working capital needs of almost every business concern. Under this arrangement, trade creditors or the suppliers of goods, inventories, and equipment provided short-term finance to the company on the basis of deferred payments of their supplies.


Business Credit Papers:

Business credit papers such as bills of exchange, promissory notes, etc., are also important sources of working capital. The acceptor of a bill of exchange gets the time for making the payment of goods purchased on the basis of deferred payment. It serves as a short-term credit extended by the creator against the acceptance of the acceptor. The same purpose is served by a promissory note also.


Customers Credit:

Advances from customers against the contracts entered into by the concern also constitute a source of short-term working capital. Advances from customers are generally asked for by companies having a long production cycle, e.g., shipbuilding industry.


Financial Institutions:

Financial institutions, such as--Investment Companies, Life Insurance Corporations, Unit Trust of India, etc., are also an important source of working capital.


Government Assistance:

Central, as well as state governments, also provide short-term financial assistance to business concerns by allowing them tax concessions and granting loans.


Indigenous Bankers:

Indigenous Bankers' Short-term working capital requirements of business concerns in India are also financed by indigenous bankers, which have recently taken the form of finance companies.


Loan from Managing Director and Directors:

Sometimes, the managing director and director also provide short-term working capital to the company in the form of a loan at a negligible rate of interest.


Depreciation Funds:

The depreciation funds created out of the company's profits also provide a reliable source of working capital so long as they are not invested in assets or distributed as dividends.


Provisions for Taxes:

There remains a time lag between making provisions for taxes and their actual payment. Thus, the funds provided for taxation can be utilized for the short-term working capital requirements of the company during the intermittent period.

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