Policies for Financing Current Assets

Policies for Financing Current Assets

A firm can adopt different financing policies vis-à-vis current assets. Three types of financing may be distinguished.

o   Long-term financing. The sources of long-term financing include ordinary share capital, preference share capital, debentures, long-term borrowings from financial institutions and reserves and surplus (retained earnings)

o   Short- term financing. The short-term financing is obtained for a period less than one year. It is arranged in advance from banks and other suppliers of short-term finance in the money market. Short-term finances include working capital funds from banks, public deposits, commercial paper, factoring of receivable etc.

o   Spontaneous financing Spontaneous financing refers to the automatic sources of short-term funds arising in the normal course of short-term funds arising in the normal course of a business. Trade (suppliers) credit and outstanding expenses are examples of spontaneous financing A firm is expected to utilize these sources of finances to the fullest extent. The real choice of financing current assets, once the spontaneous sources of financing have been fully utilized, is between the long-term and short-term sources of finances.