Small Business Finance

Trade credit represents the credit extended by the suppliers of goods and services. It is a spontaneous source of finance in the sense that it arises in the normal transactions of the firm without specific negotiations, provided its suppliers consider the firm creditworthy. It is an important source of finance in small businesses representing 25 per cent to 50 per cent of short term financing.

The confidence of suppliers is the key to securing trade credit. If the firm has a fairly good earnings record with a portion of it ploughed back in the business, it is looked upon favorably. Suppliers naturally look at the ability of the firm to meet its obligations in the short run. Such ability is usually measured by the current ratio and acid test ratio. If the firm has been prompt and regular in paying the bulk of the suppliers in the past, it is deemed to be creditworthy.

While a well established, successful enterprise may have no difficulty in obtaining trade credit; a new company or a small one with financial problems will face difficulty in obtaining it. The confidence of suppliers, a pre-condition for obtaining trade credit, can be earned by discussing the financial situation, by showing realistic plans and more important by honoring commitments. Broken promises erode confidence more than poor operating results do. It is better to make modest commitments, which may not be fully satisfying to the supplier and honor them rather than make tall promises that gratify the supplier, and fail to honor them.

The cost of trade credit depends on the terms of credit offered by the supplier. In general, the cost of additional trade credit is very high and unless the firm is hard pressed financially; it should not forego the discount for prompt payment.

Working capital advance by commercial banks represents the most important source for financing current assets in small business finance. A customer seeking an advance is required to submit an appropriate application form- there are different types of application forms for different categories of advances. The information furnished in the application covers, inter alia, the following: the name and address of the borrower and his establishment; the detail of the borrowers business; the nature and amount of security offered. The application form has to be supported by various ancillary statements like the financial statements and financial projections of the firm and small business finance.

The branch manager or his field staff processes the application. This primarily involves an examination of the factors like ability, integrity and experience of the borrower in the particular business; general prospects of the borrowers business; purpose of advance and requirement of the borrower and its reasonableness. It also includes adequacy of the margin, provision of security and period of repayment.

Once the application is duly processed, it is put up for sanction to the appropriate authority. The sanctioning powers of various officials like Branch Manager, General Manager etc are defined by virtue of the position they occupy. If the sanction is given by the appropriate authority along with the sanction of advance the bank specifies the terms and conditions applicable to the advance.

Working capital advance is provided by commercial banks in three primary ways: cash credits/ overdrafts, loans and purchase/ discount of bills. In addition to these forms of direct finance, commercial banks help their customers in obtaining credit from other sources through the letter of credit arrangement.

Under a cash credit or overdraft arrangement, a predetermined limit for borrowing is specified by the bank. The borrower can draw as often as required provided the outstanding do not exceed the cash credit/ overdraft limit. The borrower also enjoys the facility of repaying the amount, partially or fully, as and when he desires. Interest is charged only on the running balance, not on the limit sanctioned. A minimum charge may be payable, irrespective of the level of borrowing for availing this facility. This form of advance is highly attractive from the borrower point of view because while the borrower has the freedom of drawing the amount in installments as and when required, interest is payable only on the amount actually outstanding.

Before you start trading, you absolutely have to know what stocks you want to buy and hold for a while, which is called going long or holding a long stock position. You likewise have to know at what point holding that stock is no longer worthwhile. Similarly, you need to know at what price you want to enter or trade into a position and at what price you want to exit or trade out of a position. You possibly will be amazed to discover that you can still profit by selling a stock without ever owning it, in a process called shorting.

You can even make money buying and selling options on stocks to simulate long or short stock positions. Buying an option known as call enables you to stimulate a long stock position, in much the same way that buying an option known as put enables you to simulate a short stock position.

When placing orders for puts and calls, you are never guaranteed to make money, even when you are right about the direction a stock will take. The values of options are affected by how volatile stock prices are in relationship to the overall direction (up or down) in which they are headed to the small business finance.

Managing your trades so that you donít lose a bunch of money is critical. Although one canít guarantee that you will never lose money, experts can provide you with useful strategies for minimizing your losses and getting out before your stock portfolio takes a huge hit. The key is knowing when to hold them and when to fold them. You must think of your trading as a business and the stocks that you hold as its inventory.

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