Week 7 Fin/200 Checkpoint Short-Term Financing

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 several different sources available for short-term financing, which is very important for businesses to continue to run smoothly in their day to day activities. Trade credit is the most used form of short-term financing because it makes goods and materials available for the business on credit last usually around 30-90 days. Businesses use this form of credit not have cash available but to get goods. Banks offer other types of short-term financing such as bank loans which make funds available to a business but interest are put towards the money that is loaned as well as the business usually has to have assets to put up as collateral to the bank in case the loan is not repaid. The banks also offer what is called overdraft; this type of short-term financing is when a bank allows the business to go over a certain amount on their account which is determined by the businesses creditworthiness. The business also has to pay interest but it is usually less than if the company used cash credit for their short-term financing but the company also only has to pay interest on the overdrawn amount.

There are different situations a business encounters that helps them determine which type of short-term finance will suit them. If a business just needs raw materials for their day to day operations then trade credit would be a good source of short-term financing. If the company is in need of funds for their business expenses like wages, utilities, equipment repairs, or other expenses then bank loans would be a more efficient form of short-term financing. Trade credit as stated previously has a short payback period and usually must be paid back within that period where as banks can usually extend the loan for a longer period. Another factor a business...