Skip to content

CS Professional · Strategic Management and Corporate Finance · Sources of Corporate Funding

A manufacturing company in Pune buys raw material from suppliers on 45 days' credit without any formal borrowing arrangement. Which description best fits this source of short-term finance?

This is trade credit. Suppliers allow payment after a period, such as 45 days, without any formal borrowing, so it arises automatically with purchases. It is therefore called a spontaneous source of short-term finance, unlike commercial paper, overdrafts or factoring, which need instruments or agreements.

  1. ATrade credit, a spontaneous source of working capital financeCorrect
  2. BCommercial paper, a negotiable money market instrument
  3. CBank overdraft, a sanctioned limit against security
  4. DFactoring, an outright sale of receivables to a third party

Explanation

Credit extended by suppliers in the normal course of purchases is trade credit. It arises automatically with purchases and grows or shrinks with the volume of business, so it is called spontaneous finance. The other options involve a formal instrument, a bank sanction, or sale of receivables.

Did you get it right without looking?

One question tells you little. A timed set on Sources of Corporate Funding shows your real accuracy, how long you take and where you lose marks.

Practise Sources of Corporate FundingFree diagnostic mock

More Sources of Corporate Funding questions