Published On: Tue, Oct 24th, 2017

The advantages and disadvantages of short-term financing

New and established companies often need temporary funds to buy raw materials, payroll and cover cash deficits. For example, a new restaurant may not have enough customers in its first few weeks and therefore would need funding to cover short-term expenses. An established retailer may need short-term financing to purchase additional items for facing the holiday sales season.

LoansTypes you can deal with

Short-term financing alternatives include credit cards, credit lines, bank loans and commercial loans. Short-term loans are usually extended on a revolving basis or for a fixed period of one year or less. Commercial credit refers to the deferred payment terms offered by suppliers that allow buyers up to 30 days to settle their accounts. Other forms of financing include promissory notes, which are short-term legal debt documents and asset-backed financing that banks anticipate using inventory or accounts receivable as collateral for a business.

Advantages of short-term loans

Companies need short-term funds for several reasons. For a small business, the cash flow from sales may not be sufficient for growth financing needs, such as building a new production capacity, adding new sales staff and opening new outlets. Businesses can plug cash deficits or pay for emergency financing needs if they have access to credit lines and other forms of short-term financing. It may be easier for companies, especially small ones, to secure short-term financing rather than long-term or stock-based financing. Short-term interest rates are lower than long-term rates, which gives greater flexibility in operating management of your business. For people who live in UK, there are many loan features available. They don’t even need to pass the credit check to get loans. Payday loans no credit check is one of the growing finance-style in UK today.

Disadvantages of short-term loans

Rising interest rates increase borrowing costs. Businesses that rely on short-term variable rate loans will feel the effects of rate increases. Asset-backed financing also include different costs related to the interest rate and service charges. In fact, only part of the collateral is delivered in advance to the borrower. The lender may also require additional assets that were pledged as collateral. Companies that use credit cards for their short term needs might see their profit margins suffer due to higher interest rates. Short-term financing may not be the right choice as for companies already engaged in debt, they often can’t get additional sources of funds available.

Considerations above all

Management must decide on the best combination of funding based on when they need the money and what types of funding are available. For example, in an environment of falling interest rates, management may want to agree on long-term rates on favorable terms or renegotiate its existing short-term loans. With the use of cash management strategies, such as reducing expenses or being more aggressive in the recovery of accounts receivable, companies can reduce their financing needs.

By reading this finance article we hope you can maximize all options available to get loans without facing some difficulties.