Businesses need sufficient monetary resources for either the growth or continuance of their undertaking. It will not be empowered to provide goods or services to the community without short-term funding. If you are currently venturing into profit-seeking goals or even nonprofit aims, you will need to plan on how to acquire a good liquidity position through the various short term financing options.
The Need for Short Term Finance
Short-term finance solutions seek to provide a business or an economic entity with the funds it needs for its day-to-day operations. This refers to economic transactions like purchasing inventory from suppliers, paying off employee salaries, and disbursing for expenditures such as rent, utilities and other miscellaneous expenses.
As you have noticed, short-term funding is required for short term operational purposes, or to keep the firm funded throughout the fiscal year. It satisfies the working capital requirement or objective of an entity as well.
There are various ways to find the solution to short term finance. You can decide to follow one or a combination of them depending on your demands or preference.
Borrowing from Financial Lending Institutions
This is probably the most common course of action that start-up companies or developing firms do to source their short-term funding needs. Since mostly the credit term is shorter than a year, the interest expense or cost of borrowed money will not be that high. You can easily apply for a short term loan from banks and pay off your debts once you are able to convert your trade receivables for cash.
Selling Marketable Securities
You can also make use of your securities portfolio and engage in trading at the investment market. Marketable securities pertain to highly liquid assets such as trading securities, available-for-sale securities, stocks, risk-free treasury bills and bonds which have a less than a year maturity date. These financial instruments are highly convertible to cash because it can readily be sold to third party institutions or to dealers of securities.Your short-term funding can rely on these short-term financial instruments.
Aside from those previously mentioned, marketable securities earn a higher rate of return than the cash in your bank account. You can also derive interest income or dividend revenue. Because of all of this, many companies invest in them for unanticipated cash constraint events.You can source the short-term funding you need for emergencies or current payables from this financing solution.
Factoring and Discounting
You can also solve your short-term funding problem by discounting your promissory notes or factoring your credit sales invoices. They are easy ways to obtain immediate cash by merely selling your invoices or notes to a financial intermediary at a price that is lesser than the face value.
Whatever short term finance solution you apply, make sure that it works for you. Having short-term funding when you need it is vital for your business’ survival and competitiveness. Make the right choices!
John Lewis is marketing lead at SmallBusinessAngels.com.au, who provides venture capital to hundreds of Entrepreneurs with small business loans from start-up to expansion.