Short-Term Fianancing

1. Overdrafts

Overdrafts

Where payments from a bank current account exceed income to the account for a temporary period, the bank finances the deficit by means of an overdraft. They can be arranged quickly and offer a range of flexibility with regard to the amount borrowed at any time, whilst interest is only paid on the amount overdrawn. The main characteristics of an overdraft are enumerated below:

Overdrafts

Amount Should not exceed the limit, usually based on known income

Margin Interest charged at base rate plus margin on daily account overdrawn and charged quarterly. Fee may be charged for large facility.

Purpose Generally to cover short term deficits

Repayment Technically repayable on demand

Security Depends on the size of facility

Benefits Customer has flexibility; bank has to accept fluctuations

Overdrafts and short term loans compared

• Where a customer wants finance help with the day to day trading and cash flow needs, an overdraft would be suitable

• Where a customer wants to borrow for a short period of time, and wants to avoid interest fluctuations, a short-term loan is more suitable

2)Advances from customers: Sometimes companies receive a the payment partly or fully from the buyers before the supply of goods. This helps teh company in meeting working capital requirement.

3)Bank overdraft: Businesses keep currenty account with bank. Sometimes banks allow the business to make overdraft (means withdraw more than they have deposited) for a limited period at some interest cost.

4) Credit card: Financing through credit card works like trade credit. Company can purchase goods by credit card payment and pay the credit card company later.

A company can choose one or many sources of short term financing based on their need.One has to choose carefully which option is suitable for his business. A lower interest rate will always improve the cash flow. Tax shield on interest paid is one more reason why businesses prefer debt financing....