The primary goal of any business is to earn a profit, and this goal cannot be reached without the proper use of finances. A firm, whether big or small, can achieve great heights with the proper corporate financial services and appropriate management of its funds. A cash strapped business can choose in between long term or short term funds, according to their requirements. However, if the company entity requires quick funds, short term funds can provide you with great help and ease and in turn advice in the sustenance procedure. Let’s understand what short term finances are and the advantages it offers to business.
What is Short Term Finance?
Short term financing, also known as working capital, denotes the financing requirements of a business for a short period usually less than a year. It helps the various companies in increasing their inventory orders, payrolls, and daily supplies. This type of finance is generally required due to the unevenness in the cash flow or the effect of seasonality on a particular business. Let’s understand the various sources of short term financing:
Types/Sources of Short-Term Finance
There are mainly five sources of short term financing, and each type has different characteristics and can be used in different situations:
It is a kind of arrangement in which the supplier allows you to buy the goods now but pay later. There is no immediate exchange of money in this situation. Trade credit is obtainable for a period of 7, 30, 60, 90, 120 days to all but certain businesses such as goldsmiths and jewellers may increase the period of credit according to the circumstances. It allows companies to gather important raw materials without immediate payment. This way they can utilise the freed up capital for the growth of the business entity.
2.Working Capital Loans
These are loans taken for a short period and are used to provide the capital for the day to day activities of the business. It can be availed either from a bank or any other financial institution and are given out only after scrutiny of the entity, its record, the working capital cycle, etc. Once the company receives the loan, it can be repaid back either in instalments or in full at the conclusion of the term.
3.Business Line of Credit
A business line of credit is a short term loan which is mostly utilised for the business’ working capital requirements. It is a revolving account arrangement which allows the business to spend the money, repay it and then spent it again over and over again. In this financing type, a certain amount is agreed upon by the bank or the financial institution, and the business uses these funds as per their requirements, whenever they need it. The advantage of using this financing method is that the interest is only charged on the utilised amount and due to this it is a very cost-effective financing choice for your business.
Invoice discounting is a source of finance where the company’s unpaid invoices can be used as collateral for a loan purpose to a bank or a third party. It is a short term tactic of borrowing as the finance company may modify the value of the unsettled debt. It forms a significant source of working capital finance for banks and is used by the business to reinvigorate the cash flow, compensate the supplier and employees and invest back in various business processes.
Invoice factoring is very much similar to invoice discounting. The difference is that here the invoices are sold to a third party (factor) at a price lower than the possible value. This is usually done to either meet the immediate cash requirement or to ease the credit risk. Invoice factoring is considered to be a good choice for companies that require quick cash but aren’t able to avail a bank loan.
These are the prevalent sources of short term finances. The next question in your mind would be about the benefits would short term financing provide for your business. The answer lies ahead.
Advantages of Short Term Financing
Short-term financing can prove to be an invaluable tool for your business and can help your company in the time of need. The main advantages of short term finances are:
- It provides us with the option of increasing our working capital and thus helps us to concentrate on the other necessary business activities.
- It provides us with the flexibility of the utilization of capital. This can allow us to borrow only the required amount of cash when we need it.
- Since it is provided by the cash flow of the company, which is further credited to the bank account, there is no need to provide extra collateral.
- Short-term lenders are more lenient in comparison to the banks and will assess the loan of your company by analysing other avenues such as the value of the present assets.
In conclusion, we can see that short term financing can act as a boon for the companies at a perilous time. They have the potential to keep the company going at all times and help in the sustenance and growth of the company by providing finance to a company when required.
Arranging for short term finances can be a very complicated matter and a single wrong decision can lead to a disastrous effect on the business. If you are looking to acquire such finances it is advised that when in need, you should consult a finance professional who provides customised services according to your business needs. We at JAXA can help you in acquiring the short term finances along with providing other assorted services to help the growth of your business. In case you need more details regarding our services, do contact us- we’d be happy to help.