Short Term Finance

Published Date 22nd April 2009

Short term financing is most common for assets that turn over quickly such as accounts receivable or inventories.

What They Are

Short term financing is most common for assets that turn over quickly such as accounts receivable or inventories.
To fund your business in the short term, you can;

1. borrow short term from the bank - overdrafts, credit cards,

2. borrow from your creditors; better credit terms, cash lines or

3. borrow on the strength of monies owed to you e.g. invoice discounting or factoring.
These are all very useful sources for generating working capital, i.e. the money that you need for the day-to-day running of your enterprise.

Short Term Financing Options

What these sources all have in common is that they are all quite simple to set up and are relatively inexpensive provided that they are short term solutions only. If a business sought to rely on these methods long term, they could be very expensive. A brief outline of the various methods is given below:

1. Overdraft

• An overdraft is one of the most commonly used ways to finance your business. If you have a short-term need for money, an overdraft is likely to be your best bet. An overdraft can be quickly arranged.  It is the agreed amount that your bank will permit your company to borrow without notice and, in turn, you will pay interest on the sum borrowed. It is a versatile and flexible source of working capital as the amount you need fluctuates at different stages of the month or quarter.
• Overdrafts should never be used to satisfy long term needs, they are unsuitable for this type of borrowing and can prove to be not only expensive but also risky as they are usually repayable on demand.
• Overdrafts should be used for the day-to-day running of your business, such as paying bills, wages and purchasing stock, they are ideal for your business when the demand on your finances is uneven and your account is likely to move in and out of credit on a regular basis.

2. Company Credit Card

• A company credit card allows you to clearly separate business expenses from personal expenses while facilitating business transactions made by phone and the internet. They are a flexible and convenient short-term means of paying bills and making purchases.
• The bank/card issuer will agree with you a suitable credit limit for your monthly spending requirements. A Direct Debit will be set up on your account in order to facilitate repayments. You must pay in full in order to avoid interest charges.
• The itemised billing means that you can analyse your spending patterns quickly and clearly and this can help with the monitoring and tracking of employee spending.
• The bank/Credit card issuer will be part of one of the globally recognised major credit card networks for example Visa or MasterCard, thus international payments are made simple.

3. Credit Lines

• Opportunities for accessing short-term finance will present themselves if you pay great attention to both the credit that your creditors are allowing you and the amount of credit that you allow your debtors. If a situation arises where your suppliers offer short credit terms (13 days) while your business offers longer credit terms (35/65 days) or does not chase up outstanding invoices efficiently, the amount of working capital available diminishes. In effect, your customers are borrowing money at your expense.
• The development of a good relationship with your suppliers will help enable you to negotiate favourable terms of credit. The establishment of favourable terms will be vital if the time between buying the raw materials or stock and receiving the money for the finished product is longer than your suppliers' credit terms allow.
• You should also look at the credit terms you offer to your debtors. Every business must know precisely who owes them money, how much is owed and for how long. If you fail to manage your debtors, then they will start managing you. It is important to manage your debtors well to ensure you have money coming in throughout the year. Ask yourself if you need to give your customers such a generous payment window. What do your competitors offer?
• Like many such business situations, face-to-face negotiation and an understanding of everyone's bargaining position will go a long way to helping you get what you want.

4. Invoice Discounting

• Invoice Discounting is a working capital facility, which provides immediate finance (prepayment) for a maximum percentage of funds, tied up in unpaid debtor invoices. The balance is paid (less costs) as the debtor collections are received. In short, Invoice Discounting is an acceleration of cash flow.
• The responsibility of account handling remains with you. Invoice Discounting is simple to operate and, since you administer the sales ledger yourself, you retain more control over how your customers are handled.
• The client can draw additional funds based on new sales. As sales increase, debtors increase, and the level of working capital grows proportionately, thereby providing a satisfactory solution to the cash flow dilemma. Please see the Related information section for more information.

5. Factoring

• If you sell on credit, it is likely that some of your customers will not pay promptly after receiving goods or services, or that some will fail to honour debts altogether. This can obviously have serious consequences for your organisation's cash flow, especially if  it is growing rapidly and may need more funds than an overdraft can provide. One solution is factoring.
• Factoring is the selling of your debt at a discount. While you will not receive the full amount owed to you, you are given a guaranteed inflow of cash. Factoring is especially useful for generating income, when a business needs cash immediately and is willing to pay a commission.
• The agency buys all or some of your outstanding invoices and advances you a certain percentage of their value depending on the calibre of the debtor. The factor then administers the account, taking responsibility for the debt, sending out account statements to the customer, and following up unresolved debts.
• Different types of factoring are available, depending on your needs. For example, full service may involve the factor taking on all your debts; a less complete service may stipulate that the customer pays you, and not the factor - or that the factor does not take over your records.
• Factoring also serves to free up your business resources from the time-consuming and costly administration of customer account management.

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