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.
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.
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.
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.
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.
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.
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.
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.
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
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.
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.
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
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.