Sources of Short Term Financing
“Short term finance refers to financing needs for a small period normally less than a year. In businesses, it is also known as working capital financing. This type of financing is normally needed because of uneven flow of cash into the business, the seasonal pattern of business, etc. In most cases, it is used to finance all types of inventory, accounts receivables etc. At times, only specific one time orders of a business are financed”.
In short term financing the first source that we look for are loans; loans are the money that are borrowed from the lender and are expected to pay back with interest. Loans can be secure loan and un secure loan.
1. Secure Short Term Loan
A short term loan which is backed by a physical security or personal guarantee for example a working capital loan issued by a bank and secured by inventory of a company. This type of loan is known as hypothecation.
2. Unsecured Short Term Loan
A short term loan which is not backed by any guarantee or physical asset. Unsecured loans are issued to the companies on the basis of reputation in the market The short term loan either it is backed or un backed means a secure or unsecured loan is issued by financial institution in two ways:
Financial institution transfers the whole amount of the loan in the account of the borrower and the borrower uses that loan throughout the year at the end of the year the company applies for a new short term loan.
In the second type of short term loan whether its secure or unsecure is the one which revolves around throughout the year. Mean you take the loan use it return it and you take it back.
Factoring of Account Receivable
In modern finance a new way of short term financing has been initiated under this method the account receivables of the company are sold to another, third party for collection at the discount rate for example If a company hand over its Account receivable of 1 hundred thousand to another company and takes 98 thousand up front this means that the company has factored its account receivables.
December 02, 2019