Most Suppliers are generous in extending credit facility with a view to boosting trade and earning good margins. This is the reason trade credit is a vital source of finance to Small and Medium – sized Enterprises
By Nwokolo Charles Ike.
Finance is very important to all firms and it is the backbone of any business. There are various sources of investment funds to a firm and each of these sources has its associated costs. Identifying the best source to obtain relatively cheap capital is very important. There are short term funds available to Small and Medium sized Enterprises (SMES). These funds can be internal and external to the firm.
Retained Earnings
Retained Earnings are internal source of finance. It is an important source of finance to a business. It is the flow of revenue from business operations set aside for investment purposes. A choice has to be made by management between the Amount to be retained out of profits or pay out in form of cash as Dividends or Drawings. The management has to strike a balance between these competing needs in order to invest in a profitable projects or productive capacity.
Tax payment could be deferred by self-imposition or late assessment or in agreement with revenue authority until it is convenient, thereby helping a firm to meet most urgent obligations or short term investment objectives
Trade Credit
This is a form of Short term financing available to all business. This is the process of buying something on credit by a firm or Suppliers supplying goods on credit. The benefit derived in this form of finance is that payment is deferred to a favorable time period. Trade credit allows proceeds of goods or services to be received by the buyer or customer while payment is made at agreed period or when adequate cash is available to settle obligations.
Most Suppliers are generous in extending credit facility with a view to boosting trade and earning good margins. This is the reason trade credit is a vital source of finance to Small and Medium – sized Enterprises. The success of this source of finance depends largely on the commercial credit terms of the Suppliers and this is an important factor in determining the availability of this source of capital.
Short Term Commercial Bank Loans
The most important source of finance to SMEs is Short Term Commercial Bank Loans. Banks make profits from giving out Loans to their Customers. The Loan may be in form of Over Draft or single term Loan ranging from Six (6) months to One (1) year.
Bank Loans
Bank Loans may be secured or unsecured, but many Loans are secured by the general Credit or assets of the business. It may be secured by the firm’s principal personal guarantee, assignment of receivable, inventory or cash value of life insurance etc. Short Term source of finance represent current liabilities and are settled by cash payment as at when due.
Bank Overdraft
Bank Overdraft is granted by Commercial Banks and to credit worthy customers or companies. This can be granted for One (1) month to One (1) year and is self-liquidating from the Sales proceeds of the business.
Deferred Tax Payment
This is also a vital source of short term fund. Tax payment could be deferred by self-imposition or late assessment or in agreement with revenue authority until it is convenient, thereby helping a firm to meet most urgent obligations or short term investment objectives.
Finance and financial resources are very crucial for smooth running of a business and every effort put in place to ensure adequate flow of funds for the success of a business is worth the risk.
•Consultant.
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