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Sources of Finance
Lines of Credit from Creditors
This source of finance really belongs under the heading of working capital management since it refers to short term credit. By a 'line of credit' we mean that a creditor, such as a supplier of raw materials, will allow us to buy goods now and pay for them later. Why do we include lines of credit as a source of finance? Well, if we manage our creditors carefully we can use the line of credit they provide for us to finance other parts of our business.
Take a look at any company's balance sheet and see how much they have under the heading of 'Creditors falling due within one year' - let's imagine it is £25,000 for a company. If that company is allowed an average of 30 days to pay its creditors then we can see that effectively it has a short term loan of £25,000 for 30 days and it can do whatever it likes with that money as long as it pays the creditor on time.
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