SHORT-TERM FUNDING

WHAT IS SHORT-TERM FUNDING?

Short-term funding refers to money given to a company for a short period of time, usually less than a year. This assists the company in generating working capital for operating needs, as the company’s cash flow may be irregular or their activity is only seasonal. The company typically borrows smaller sums via online loans, lines of credit, or invoice financing.

WHAT ARE THE DIFFERENT TYPES OF SHORT-TERM FUNDING?

Short-term funding can be divided into five categories:

  • Trade Credit — A 28-day period of floating time is given to businesses to pay for goods and services they are purchasing or receiving.
  • Working Capital Loans — After evaluating the nature of the firm, banks and other financial organizations provide short-term loans.
  • Invoicing Discounting – refers to securing money in exchange for the submission of an invoice for which the business expects to receive payment in the near future.
  • Factoring — a similar arrangement to invoice discounting in which the business sells invoices to lenders in exchange for loan repayment.
  • A business line of credit is one of the most effective ways to finance working capital. The company can approach banks for a loan based on the credit line structure, which is based on credit scores, a model business, and predicted cash flow.

WHAT ARE THE ADVANTAGES OF TAKING OUT A SHORT-TERM LOAN?

  • Less interest – because the loan is for a short period of time and the debt is paid within a year, the total amount of interest charged is lower than with long-term loans.
  • Quickly disbursed – Because the danger of defaulting on loan repayments is lower than with long-term loans. Therefore, short-term loans are sanctioned in a shorter amount of time.
  • Less Documentation — Because there is less risk involved, short-term loans require less documentation for approval.

WHAT ARE THE DISADVANTAGES OF TAKING OUT A SHORT-TERM LOAN?

  • Lower Amount – Because of the short repayment terms, banks are more inclined to authorize lower amounts of money.
  • Shorter Payments Period – Because the fixed period of time is always less than a year, higher loan amounts will result in higher repayment amounts, thereby increasing the risk of failing on repayment plans. This can lead to a borrowing cycle in the firm. In addition, interest rates are rising in the current cycle, which can have an impact on businesses and their liquidity.