Checkpoint Short Term Finance

CheckPoint Short-Term Financing

Write a 200- to 300-word paper listing the different sources of short-term financing. Discuss the

characteristics of each source and explain why a company might choose one over the other.

There are many methods for which a firm can seek short terms of financing some of these include:

1. Overdrafts

2. Short-term loans

3. Bills of exchange

4. Promissory notes/commercial paper

5. Inventory loan

6. Letters of credit

7. Factoring

1. Overdrafts—(Line of Credit)

Most companies use this type of financing for their short term money needs because it is convenient and

not overly expensive. The following is a definition of how this works:

The most common form of business borrowing, an overdraft is a type of revolving loan where

deposits (credits) are available for re-borrowing, and interest is charged only on the daily

overdraft (debit) balance. An overdraft is approved only for a fixed period (usually one year) after

which it is must be renegotiated.

2. Short term loans—A short-term business loan can help even out cash flow when your

accounts payable schedule is shorter than your sales cycle. Short-term business loans can be a

good way to raise working capital and cover accounts payable. Short-term loans can have

maturations of as little as 90-120 days or as long as one to three years, depending on the purpose

of the loan. In general, banks require very specific repayment plans for their short-term loans

3. Bill of Exchange (BOE)

BOE is the most often used form of payment in local and international trade.

Unconditional order by one party (the drawer) to another (the drawee) to pay a certain sum,

either immediately (the sight bill) or on a fixed date (the term bill), for payment of goods and/or

services received. The drawee accepts the bill by signing it, thus converting it into a post-dated

check and a binding contract. It is also called a draft but, while...