Short-Term Financing
RUNNING HEAD: SHORT-TERM FINANCING
Short-Term Financing
Nat Flyer
University of Phoenix
Businesses need cash flow, and most businesses need some sort of credit to keep the company solvent throughout its cash cycle. Thus, every business needs short-term financing to add to their cash flow, whether or not they recognize it as such. Short-term financing refers to credit where the repayment term is shorter than one year. Credit-worthiness must usually be established before any short-term financing will be made available. Short-term financing sources fall into two basic categories: secured and unsecured, and the options for short-term financing available to any given company depends on the size and credit-worthiness of the business.
UNSECURED METHODS OF SHORT-TERM FINANCING
The simplest and most common form of short-term financing is unsecured trade credit, where one company allows another to purchase its goods or services without paying for them immediately. Credit is usually extended for 30 to 60 days. Many business people believe that they are getting this purchase "free of charge," and do not realize that they are actually purchasing their inventory on credit. The credit is an element hidden within the "discount" offered if the product is paid for within a specified period, usually by 30 days. If the discounted price is calculated as the "base price", one can readily see the cost of this method of financing. Often times, the buyer is not aware of these hidden charges, or the true cost of the credit. However, other forms of raising capital are not always available to small businesses, and using trade credit creates additional needed cash flow because the cash you would have outlayed for inventory is not expended until sometime later, and this cash is used in the interim for other needs in the business. Most companies, large and small, use it.
Many companies...
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