Short term financing is essentially to provide capital deficit businesses funds for a short term period of a year or less.
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.
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.
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
There are many methods for which a firm can seek short terms financing some of these include:
Ross Thompson Christensen Westerfield Jordan, 'Fundamentals of Corporate Finance', 2nd edition, 2001 , 466-499