Financing

Final

Most people look at a firm and don’t realize that most of them rely on short term financing to run their business. During the recent financial melt down in America many smaller firms ran into trouble when they couldn’t secure loans for things like more material, new capital and even payroll. There are a few ways that firms get this quick cash; they include spontaneous financing, short-term bank loans, factoring and commercial paper (Kelly & McGowan, 2012).

Spontaneous financing is when certain funding arises naturally during the course of conducting business. One way this happens is when a supplier of materials extends the firm credit on the material they receive. Consider a company that makes widgets and they receive 100 boxes of widget parts from the supplier. In this case the manufacturer would receive the parts but not have to pay for them up front. Instead there are terms set by the supplier that must be satisfied by the manufacturer, if not then the price goes up (Kelly & McGowan, 2012).

Short-term bank loans are another great way for a business to get fast money to run their business. When a company gets a short-term loan from a bank they are normally only financed for a term of 30-90 days and must be paid back in full. This allows the business to get the cash they need to buy more widget parts, pay employees, pay rent and to satisfy other business needs.

Factoring is yet another way a firm can make some fast money. When a company uses this technique they are actually buying another company’s accounts receivables and collecting on the debt. For example, ABC Widget Co. goes to XYZ department store and offers to buy pay them 100k for the 120k in outstanding store credit accounts. XYZ agrees and now has 100k on hand for their use while ABC is now going to get 20k above what they paid for the debt.

When none of the other methods are right for your company then commercial paper might be the way to go. When a company buys commercial...