Retained earnings and short-term sources

Retained earnings means ploughing back part of the profits into the business instead of paying it all out. It is a permanent source, has no explicit cost (no interest, no fees), and needs nobody's permission. But it means lower dividends for the shareholders, and the amount available is uncertain, as profits rise and fall.

Trade credit is credit given by suppliers: you buy goods worth ₹15,000 today and pay for them in, say, three months. It is convenient, readily available, and creates no charge on the firm's assets (no security is pledged). But easy credit can tempt a firm into overtrading (buying and selling beyond its means), and it can be a costly source.

Factoring: a firm sells its receivables (money its customers owe it) to a factor, usually a bank or finance company, at a discount. The factor then collects the money from the customers. Factoring may be with recourse or without recourse (non-recourse). The firm gets cash at once and need not chase its customers.

Lease financing: the lessee uses an asset (such as a machine) owned by the lessor, and pays regular lease rentals. The firm gets the use of the asset without buying it. The rentals are deductible when working out taxable profit, and there is no dilution of control, since no new shares are issued.

Two more sources:

• Public deposits: the firm borrows money directly from the public, usually for up to 3 years, at a rate of interest higher than banks offer.
• Commercial paper: an unsecured promissory note (a written promise to pay), issued for 7 days to 1 year, in units of ₹5 lakh or more. Only large, highly rated firms can raise money this way.