SHORT TERM SOURCES OF FINANCE: BEST OPTIONS FOR ANY BUSINESS (+DETAILED GUIDE)

The term, “short-term sources of finance,” is usually a huge put-off to entrepreneurs, particularly with the supposed disadvantages that come with it. But the truth is, short-term finances are really helpful and reliable if the right steps are put in place. These steps are outlined in this post to give you a clear perspective on this topic. It basically covers the definition, advantages, types, lists, and PDFs of short-term sources of finance.

Short-term sources of financial definition

Short-term finance is defined as an aid in the form of credits or loans to an enterprise or corporation for a period of less than one year. It covers a period of a few days to a year, although in some special cases it might exceed a year. However, short-term financing usually comes in form of loans.

The aim of these loans is to cover gaps between income and expenses in a short period of time, ranging from one year or less. Short-term loans majorly help enterprises manage current liabilities like inventory, the supply of raw materials, wages to labor, and payment of salaries.

Furthermore, the availability of these funds ensures enough liquidity in the enterprise, thereby enhancing the day-to-day running of the enterprise.

The advantages of short-term sources of finance

The numerous advantages of short-term sources of finance are listed below. Revenues are essential for the success and steady flow of a business and as we all know most times profit isn’t always enough. So for businesses to continue to expand, it always needs a sufficient source of revenue which short-term finance is here to provide for you.

The advantages of short-term sources of finances could get tricky, but I will try as much as possible to set an understandable overview of why you need short-term finance for your business

Small business owners will always desire to grow and expand their horizons. Doing so will include embracing the advantages of short-term sources of finance which would help in steps like opening new locations. Also in buying additional warehouses, and getting bigger buildings. Achieving this growth will obviously require funding and subsistence capital.

In whichever way you plan to expand to fit in seasonal and societal trends you will definitely need short-term funding to cover capital and funds stress as well as save time and purchase items with ease

2 . EMERGENCIES

Emergency situations are occurrences that even the most perfect person can’t prevent. Being ready for an accidental happening should be a must for a business or enterprise. To ensure the cover-up for these accidental happenings, every business should get insurance. Some of these accidental happenings would include computer crashes, equipment breakdowns, or even natural disasters.

Short-term finances serve as a special aid in getting insurance quickly to businesses as, in most cases, you can get as little as $5000 and as much as $150,000, which is enough to take care of whatever occurrence life throws at you with ease.

3 . FAST APPROVAL

Just like a payday loan, short-term finances always get easy approval depending on the lender, and in most cases, you get to receive your cash that same day. The ease with which it relieves businesses in urgent situations by fast approval of their finances can never be overemphasized. Very profitable for businesses in need of quick cash.

4 . LESS INTEREST

The normal norm is that the longer you owe the lender, the higher your interest rate. The fact Because the limit for this loan is small, the interest rate is also small as it allows businesses to make a profit out of the short-term limit in which this loan is provided compared to the long-term ones.

5 . CREDIT RATING

The short-term loan helps improve the credit ratings of a business with already bad ratings. Because it is short-term finance you tend to make efforts to measure up work so as to reach the specified time of refund.

Getting short-term finance, in other words, helps you to be up and doing to enable you to pay up at the stipulated time. Thereby, aiding your credit rating to a good score when payments are on time.

6 . IT IS SHORT-TERM

People tend to love this loan a lot because it is simply a short–term loan because it is not a perpetual bondage loan like the long-term. People like the idea of getting loans and paying them back almost immediately so as to get the borrower’s concept off their minds. This form should be the most popular advantage of short-term sources of finance.

Getting a long-term might seem like it’s never going to end in payback. The short-term ones, since their interest is less and their time limit as well, it’s less likely to get stress and tension off business owners.

TYPES OF SHORT-TERM SOURCES OF FINANCE

These are the types of short-term sources of finance, and choosing any particular type of these short-term finances, knowledge of them must be first ascertained.

#1 TRADE CREDIT

 Popularly called the immediate source of short-term finance. Trade credit is a normal source of short-term finance that arises in the day-to-day activity of a business without special negotiations. Also, it is between two customers whereby the supplier arranges supply goods to her/his customer on credit expecting payment after a short period of time.

Getting this loan you must ensure that your credit ratings or worthiness in the market is absolute of good value. Generally, this source of short-term loans comes in form of a bill exchange or open account.

Popularly the most used loan covers 25-50% of the general usage of the short-term sources finances.     Possessing this short-term finance might be easy for existing businesses but for new businesses and enterprises it would be hard as it requires a record of credit, payment record, and liquidity positions.

The supplier wants to build confidence with a buyer to secure the possibility of due payment while the buyer in return should ensure affirmation by discussing her/his business records with the supplier.

Advantages of trade

  • Availability when needed especially in urgent cases.
  • informality wouldn’t be overemphasized as it is immediate finance for the needy businesses.
  • Its Flexibility increases the growth of the business sale.

Some trade disadvantages also include:

The high cost of trade credit beyond the cash discount  period

  • Loss of goodwill: referring to a business that does not have a good payment record, it wouldn’t be easy to obtain trade credits in the market. Cost of accounting and administration especially in a case where the list of credit supplied is long.
  • The supplier might lose track of the default payment. Thereby affecting her/his business subsequently the supplier might decide not to engage again in trade credit.

#2. DEFERRED INCOME

This is a type of short-term source of finance whereby income is received in advance, by the business for the supply of goods or services in the future. The income increases the business’s liquidity and makes up an important source of short-term finance.

 In a case where the firm is manufacturing a special product on special order, having a monopoly of power, great demand for its product, and services then advance payment can be on-demand.

N.B: These payments will never show as revenue till the supply of goods or services rather it shows in the balance sheet as income received in advance.

 #3. ACCRUALS

Accruals are a type of short-term source of finance that represents a liability that a firm or business has to pay for the services or goods already received. This is a profitable and interesting free source of financing. Interest, taxes, salaries, and wages best make up an accrual form of finance.

Accrued expenses are majorly those expenses in which a company owes another. But the expenses are not yet due to the stipulated amount not paid. The longer the time in payment of expenses the bigger the number of funds provided by the employees. When the level of activity increases in a firm so does accrual increase automatically. Because their treatment is a cost-free source since it doesn’t involve any payment of interest.

 Firms should note that the use of accruals as a source of working capital paying might not be possible.

  #4. PUBLIC DEPOSITS

     These are terms in the form of unsecured deposits. In order to solicit for the business in a measure of both large and small from the general public. Primarily to finance their working capital requirements. A business wishing to achieve the public deposit should make an advert through any means to attract. It can last for a period of 6 months to 3 years.

 This deposit renews from time to time because it enables companies to use public deposits as medium-term finance. The public deposit of a company should not exceed 25% of its share capital and free reserves. Although the company requires to set aside 10% of deposits maturing by the end of the year. A public deposit has become the major form of financing for companies in India.

You might want to read: List of most profitable small businesses

Some public deposit profits include:

  • These deposits are actually cheaper than bank loans, companies prefer to deposit with well-established companies because of interest rates.
  • Only a few regulations are required for this particular short-term finance as it installs accepting public deposits.
  • Dilution of ownership of the business isn’t a problem in this particular type of loan as public depositors do not have any voting or management right.

Public deposit demerits include :

  • Funds are totally limited as the money raised depends solely on people or other companies’ willingness or desire to deposit in a particular company.
  • When the company requires huge amounts of money in their business, it might be a little diff ult for the company to get huge depositors.
  • New or growing companies don’t stand a chance in this type of short-term source finance.  Because most depositors always go for companies they are familiar with. In most cases, they tend to check their credit records as such. This means that small companies don’t stand a chance.

#5. COMMERCIAL PAPER

   This short-term stands for an unsecured promissory note. Given to firms that possess high credits to a fair extent. This type is an essential money market instrument. Commercial Paper is a major benefit to only large firms and businesses with good financial standards.

This type of short-term finance was first introduced in India on the 27th of March 1989 by the RBI. In the Indian money market, between the All-India FINANCIAL INSTITUTES (FIS) and the Primary Dealers (PIS).

The duration of short-term loans is 90 to 365 days. The maturity of the CP does not last longer than 270 days. Since most of their investors are individuals, corporate and incorporated companies, non-resident Indians, foreign international investors, and also banks.

FEATURES OF Commercial Paper

  • There is really no secondary developed market for commercial paper.
  • Paper can be issued to investors by the company through banks and bank dealers.
  • The issuer of the paper guarantees the buyer a fixed price in the future. In terms of a number of assets and liquid cash,
  • This loan serves as evidence for a certificate for unsecured debts.

Types of Commercial Paper

2. UNSECURED COMMERCIAL PAPERS: These papers are allotted without any form of security, and they are even traditional papers.

Read Also: CASH BASIS ACCOUNTING: Definition, Expense Recognition & Basic Principle 

Other types of this short term include:

  • paying another individual or bank a specified amount.
  • check the draft where the withdrawal is from the bank.
  • A draft is a written guide by an individual to another directing him to pay a stipulated amount to a third party.
  • Certificate of Deposit: Banks confirm the receipt of the deposit

            FORMULA FOR COMMERCIAL PAPER

The discount price for a commercial paper can be calculated thus as below :
  •        Price= face value / [1x yield x (number of days to mature/365)]
  •         Yield= (face value – price) / (price x number of days to mature) x 365 x 100.

List of Short-Term Sources of Finance

A list of short-term sources of finance can be considered numerous, although the essence of the list of short-term sources of finance is to assist you to make up your mind on which list of short-term sources of finance would best suit your business.

#1 INGENIOUS BANKER

#2 TRADE CREDIT

#3 INSTALLMENT CREDIT

#4 FACTORING

#5 ACCRUALS

#6 ADVANCES

#7  COMMERCIAL PAPER

#8 DEFERRED INCOMES

#9 PUBLIC DEPOSITS

#10  COMMERCIAL BANKS.

This is a list of short-term sources of finance. Making a choice on which list of short-term sources of finance to use should be your first step.

SHORT TERM SOURCES OF FINANCE PDFS

You can read recommended short-term sources of financing PDFs below. These PDFs will help you make more informed decisions on how to source funds.

Sources Of Short-Term Finance And Investment Opportunities

https://www.docsity.com/en/short-term-sources-of-finance-pdf/2336590/

https://docplayer.net/19110983-18-sources-of-short-term-finance.html

The purpose of this short-term source of finance PDFS is to provide a versed knowledge of the short-term sources of finance. Besides, there is no wasted knowledge. In this case, the study of short-term sources of finance PDFS has not wasted knowledge.

Conclusion

Short term finances have proven to be a sure funding agency for businesses and companies. Its easy usage has proved it more suitable than other forms of sources of finance. As long as a full understanding of the finance ways is met.

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