Sources of Financing Working Capital

After determining the level of working capital, as illustrated in the preceding section, a firm has to decide how it is to be financed. The sources of finance for working capital can be broadly divided into four categories

1. Trade credit

2. Bank credit

3. Internal financing

4. Issue of share capital or debenture

The first three sources of finances are available to any type of firm viz. single proprietorship/partnership firms, private/public limited company etc., but raising funds through public issue of share capital or debenture is an option that only a public limited company can resort to.

Trade credit is the primary source of working capital finance for Indian firms. It comprises mainly of obtaining raw material or goods on credit and short-term borrowings from trading partners.

Short term bank credit is another important source of working capital. To obtain short-term bank credit, working capital requirements have to be estimated by the borrowers and the banks are approached with the necessary supporting data.

The banks determine the maximum credit based on the margin requirements of the security offered against credit grant. For example, if the margin requirement of a particular item is 60%, the bank will be prepared to provide credit upto Rs.40 thousand against the security of an asset worth Rs.1lakh.Besides providing credit for short-term through loan, overdraft, purchasing and discounting bills and cash credit; banks also advance term loans for working capital.

With a view to financing additional working capital needs, issue of additional shares or floating of debentures is another way. The companies eligible to raise capital through this option are required to follow the guidelines issued by the Government in this regard. Also, most of such companies are listed in the stock exchange.

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