As a Finance Manager, one of the critical responsibilities is to ensure that the business has adequate liquidity to meet its short-term obligations and to finance its day-to-day operations. Working capital management is fundamental to the health of any enterprise, and a key component of this is arranging short-term financing. The money market, which deals with short-term borrowing and lending usually for a period of up to one year, offers a variety of instruments and avenues to raise short-term funds. Choosing the appropriate source depends on factors such as the cost of borrowing, flexibility, speed of access, risk, and the financial strength of the company. As a Finance Manager, I would evaluate and prefer the following money market instruments and sources to meet the working capital needs of my business:
1. Commercial Paper (CP)
Commercial Paper is an unsecured promissory note issued by large, creditworthy companies to raise short-term funds, usually for a period ranging from 7 days to one year. It is issued at a discount to face value and redeemed at par. CP is a popular instrument for companies with strong credit ratings as it offers a lower interest cost compared to bank borrowings.
Advantages:
- Cost-effective as the interest rates are generally lower than bank loans
- Quick access to funds for companies with a high credit rating
- Flexible tenures to align with cash flow cycles
Suitability:
Commercial paper is best suited for companies with consistent cash flows, low debt, and high credit ratings. As a Finance Manager, I would prefer this route if my business has a strong credit profile and a good reputation in the market because it allows me to raise large amounts quickly at low interest costs without the need for collateral.
2. Bank Overdrafts and Cash Credit
Overdraft and cash credit facilities from commercial banks are one of the most commonly used forms of working capital financing. These facilities allow companies to withdraw funds beyond their account balance up to a sanctioned limit. The interest is charged only on the utilized portion.
- Highly flexible and convenient; funds can be drawn as needed
- Interest is payable only on the amount utilized
- Helps in managing daily liquidity fluctuations
Suitability:
3. Trade Credit
Trade credit is a spontaneous source of short-term finance provided by suppliers. When a company purchases goods or services on credit, the supplier allows a deferred payment period, often ranging from 30 to 90 days.
- No formal interest cost, often considered a cost-free credit
- Simple to arrange and does not require security
- Enhances the business’s cash conversion cycle
Suitability:
While trade credit is not a formal money market instrument, it is a critical source of working capital financing. As a Finance Manager, I would strategically negotiate extended credit terms with suppliers to conserve cash and reduce reliance on external borrowing. It is particularly beneficial when the business has strong vendor relationships and a good payment track record.
4. Inter-Corporate Deposits (ICDs)
These are unsecured short-term loans extended by one company to another, usually within the same group or with mutual business interests. The tenures may range from 3 months to 1 year, and interest rates are mutually agreed upon.
- Quick and informal arrangements
- Competitive interest rates based on mutual relationships
- No need for regulatory approvals or public disclosures in many cases
Suitability:
ICDs are useful when the borrowing company has limited access to formal market instruments or wants to raise funds quickly without regulatory complexity. As a Finance Manager, I would explore ICDs if the company has allied or group companies with surplus liquidity. These are particularly useful for managing temporary cash shortages.
5. Treasury Bills (T-Bills)
Though primarily an investment instrument issued by the government, treasury bills can be used in reverse repos or sold in the secondary market to raise funds quickly. T-Bills are highly liquid and carry minimal risk.
- Very low risk due to sovereign backing
- High liquidity; can be sold in the secondary market
- Used in repo transactions to raise funds
Suitability:
While not a direct borrowing tool, T-Bills held in the investment portfolio of a company can be monetized during short-term liquidity crunches. As a Finance Manager, I would maintain a portfolio of T-Bills or similar short-term instruments that can be quickly liquidated or used in collateralized borrowings to meet working capital needs.
6. Working Capital Loans from Banks
These are short-term loans specifically designed to meet a company’s working capital requirements. They may be sanctioned based on the company’s current assets, turnover, or creditworthiness.
- Tailor-made for working capital financing
- Structured repayment schedule
- Enhances liquidity planning
Suitability:
When a business requires a lump sum amount to finance large working capital gaps (for example, due to seasonal demand or bulk orders), a working capital loan is more suitable than overdraft or CP. As a Finance Manager, I would consider working capital loans when there is a predictable need for funds over a fixed duration and where cash flows can support repayment schedules.
7. Bill Discounting and Factoring
Bill discounting involves selling trade receivables (bills of exchange) to a bank or financial institution at a discount before their maturity. Factoring is a broader arrangement where a factor manages a company’s receivables and provides funds against them.
- Converts receivables into immediate cash
- Improves cash flow without increasing liabilities
- Factor may also take over collection and credit risk
Suitability:
This method is particularly beneficial for businesses with long receivable cycles or those heavily dependent on credit sales. As a Finance Manager, I would explore factoring or bill discounting if my business faces delays in customer payments but has strong and reliable receivables. It helps in accelerating the cash cycle without taking on additional debt.
8. Certificate of Deposit (CD) – Raising Funds Indirectly
Though CDs are primarily issued by banks, corporates can indirectly benefit by investing in them when there is temporary surplus, or through repo transactions by pledging them. While not a direct borrowing tool for companies, it may be used strategically by financial subsidiaries.
Suitability:
As a Finance Manager, I would consider CDs more for parking surplus funds, but in certain structures involving financial subsidiaries, they could be part of liquidity management strategies.
9. Commercial Banks – Line of Credit Arrangements
A line of credit is a pre-approved borrowing limit that a business can draw upon as needed. This is slightly more formal than an overdraft and often comes with a fixed tenure and periodic renewal.
- Ready access to funds up to a limit
- Helps in managing seasonal or fluctuating cash needs
Suitability:
A line of credit is ideal for businesses that need frequent but unpredictable access to short-term funds. As a Finance Manager, I would keep a line of credit in place as a buffer for unexpected working capital needs, emergencies, or to take advantage of short-term business opportunities.
Conclusion
In conclusion, the choice of source for short-term borrowing from the money market depends on various factors including the company’s creditworthiness, cost of funds, liquidity position, and the urgency of need. As a Finance Manager, my preferred sources for raising short-term loans would be a combination of Commercial Paper (for low-cost large borrowing if we have high credit rating), bank overdraft/cash credit (for flexibility), trade credit (as interest-free support from suppliers), and inter-corporate deposits (for quick informal funding). In addition, I would maintain strong banking relationships to access working capital loans and lines of credit when needed. The ultimate goal is to ensure uninterrupted business operations with minimum cost and optimal financial efficiency. An effective short-term financing strategy must be proactive, diversified, and closely aligned with the company’s cash flow projections, market conditions, and risk appetite.
Subscribe on YouTube - NotesWorld
For PDF copy of Solved Assignment
Any University Assignment Solution
.webp)
