Short Term Financing Working Capital
Short term financing is either a credit or loan facility which has a maximum maturity of about a year.
It is a credit arrangement that finance a group of loans which have been resold to company investors.
The short term financing working capital provides capital deficit funds from businesses for a maximum duration of around a year. These funds are used by the business to run their daily operations which include the inventory, ordering of supplies and the wages to employees. In example, when a firm has placed an order and pays through finance. This finance is expected to recoup by the selling of the ordered goods in the span of within a year.
Contrary to long term financing, the decisions made within the short term are usually during the seasonal peaks within a business wherein borrowing finance is much safer and also much more popular. The base rate of the interest changes according to the loans that have accumulated in that particular time.
There are several examples of short term financing working capital, which include short term loans, overdrafts, promissory notes or commercial papers, letters of credit, bills of exchange, inventory loan, factoring, letters of credit and short term Eurocurrency advances.
It is through short term financing that the company is able to manage certain risks such as inflation. Through the liabilities and underlying assets this technique is preferable due to the decreased price as compared to long term debt, and since it is easily obtained. Working capital financing is essential for small scale firms and businesses. This is also because of their limited access to certain equity or capital markets and the availability of committing to a long term debt. This is what makes small businesses dependent on the short terms debt that they make, which is linked directly to their working capital.
Moreover, borrowers have the tendency to overlook certain choices made in short term financing and therefore commercial loans. This is why all financing decisions and transactions should be carefully inspected and evaluated. There are of course instances wherein it is practical to consider short term financing working capital. This includes the instance wherein credit card processing, the merchant cash advance and commercial real estate loans are concerned.
It is essential to review the short term financing decisions when interested in refinancing or selling certain business properties in a specific short frame of time. This will allow reasonable mortgage lockout fees and penalties for prepayment as compared to those that are implemented in long term financing working capital. This is through the proper identification of all the factors that may affect short term borrowing. It is also advisable to calculate the annual interest rate based on the short term borrowing or minus the compensating fee requirement.
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