Short Term Financing

Provides information about short term financing for businesses, it also provides some examples of sources of short term financing.

What is Short Term Financing?

Short term financing is essentially to provide capital deficit businesses funds for a short term period of a year or less.

What is short term financing for?

These funds are usually for businesses to run their day-to-day operations including payment of wages to employees, inventory ordering and supplies

An example of short tern financing could be when a firm places an order for raw materials, it pays with finance and anticipates to recoup this finance by selling these goods over the period of a year.

Difference between Short term and Long Term financing

In contrast long-term financing decisions are involved when a firm purchases a special machine that will reduce operating costs over, say, the next five years.

Following from the earlier explanation that short term borrowing should be used for working capital requirements for day to day operations of a business. Industries with seasonal peaks and troughs and those engaged in international trade will be heavy users of short term borrowing finance.

Short Term Financing and Lenders

Lenders favor businesses that exhibit strong management, steady growth potential and reliable projected cash flow (demonstrating the business ability to pay the monthly interest payments on this line of credit from its projected.

However Lenders normally charge a higher base rate of interest for operating loans reflecting this relatively weaker security position

Example of Short Term financing sources

There are many methods for which a firm can seek short terms financing some of these include:

  • Overdrafts
  • Short-term loans
  • Bills of exchange
  • Promissory notes/commercial paper
  • Inventory loan
  • Letters of credit
  • Short term Eurocurrency advances
  • Factoring

  • Ross Thompson Christensen Westerfield Jordan, 'Fundamentals of Corporate Finance', 2nd edition, 2001 , 466-499