Short Term Financing
Meaning of Short-Term Financing
Short-term financing consists of all those liabilities that are originally scheduled for repayment within one year. Short-term financing is used to finance the working capital of the firm. The firm uses this short-term financing to enhance its operating efficiency of the firm. The funds from short-term financing are used to cover day-to-day expenses such as the purchase of raw materials, salary, wages, etc.
The requirement of short-term financing depends upon the nature, goal, and operation of the firm and the selection of sources of funds depends on respective risk, maturity periods, cost, and provisions for the respective financing sources. Here, Short term financing is all about selecting the sources of funds that have the lowest cost and risk and fits the firm’s policy as well. Different short-term financing sources are evaluated based on the respective cost and requirements of the firm.
Characteristics of Short-Term Financing
|Important characteristics of short-term financing are as follows:|
Short-term financing has its own merits and demerits.
Advantages of Short-Term financing
|Some of the merits of Short Term Financing are as follows:|
Disadvantages of Short-Term Financing
|Some of the demerits of Short Term Financing are as follows: |
Sources of Short-Term Financing
There are several short-term financing sources available to a firm. These sources and be broadly classified as secured and unsecured sources. Further, these two sources can be classified as spontaneous and non-spontaneous and account receivable financing, and inventory financing.
A. Unsecured Sources
Unsecured Sources of short-term financing are those that do not require any collateral. Firms with high credit ratings can use these sources. Unsecured sources can be classified as spontaneous and non-spontaneous sources. Lenders charge higher interest rates and processing fees for short-term financing due to the higher risk involved. When a company is limited in tangible assets or has a higher level of leverage, unsecured loans are often the only option.
In spite of the fact that unsecured loans do not have collateral backing, they still offer lenders and borrowers some value. Short-term loans that are unsecured retain some benefits for both parties. A borrower can obtain an unsecured loan from a bank, financial institution, or a private lender. Despite the lack of collateral and higher interest rates, the nature of these loans remains the same.
a) Spontaneous Sources: (i) Account payables,(ii) Accruals
b) Non-Spontaneous Sources: (i) bank loans,(ii) Money market Instruments
B. Secured Sources
Secured sources of short-term financing are those which can be obtained with collateral of assets. Unsecured sources of financing are based on the creditworthiness and financial soundness of the firm. There are many companies that have no good financial conditions and credit ratings and may be unable to obtain short–term financing funds can arrange funds with the help of secured sources. These sources of financing need a guarantee or collateral of assets. Here we discuss the short-term sources of funds with the help of inventory and accounts receivable.
a) Account receivable financing: (i) Pledging AR, (ii) Factoring AR
b) Inventory Financing: (i) Floating lien, (ii) Chittal mortgage, (iii) Trust Receipt loan, (iv) field warehouse receipt loan, and (v) Terminal warehouse receipt loan.
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