Short term sources of funds
/What are Short Term Sources of Funds?
There are many short-term sources of funds available to a company, which require varying levels of collateral, personal guarantees, and interest expense. These funds are needed to cover immediate funding needs that would not be addressed by a long-term loan. Here is a listing of potential sources of short-term funds:
Delay Paying Suppliers
Delaying payments to suppliers is a common way to manage working capital. By extending the payment period, a company can hold onto its cash longer, allowing it to use those funds for other immediate operational needs such as payroll, inventory purchases, or unexpected expenses. This approach can be especially useful during periods of tight liquidity. However, consistently delaying payments may strain supplier relationships, potentially leading to less favorable terms, supply disruptions, or even loss of credit privileges. Therefore, while effective in the short term, this strategy should only be used with great care.
For example, a small retail business orders $10,000 worth of merchandise from a supplier with payment terms of net 30 days. Instead of paying on day 30, the company delays payment until day 45. During those extra 15 days, the retailer sells a portion of the inventory and generates $7,000 in revenue. By holding onto the $10,000 longer, the business uses incoming sales revenue to cover other expenses like rent and payroll without needing a loan or dipping into reserves. This delay temporarily improves the company’s cash flow, giving it more flexibility to manage operations.
Collect Receivables Faster
You can add staff and use a variety of procedures to accelerate the payment of accounts receivable by customers. For example, you can concentrate collection efforts on the largest overdue invoices, on the grounds that it is more cost-effective to bring in a few of these payments than a large number of smaller payments associated with smaller invoices.
Issue Commercial Paper
Commercial paper is quite inexpensive, but is only available to large firms with a high rating from a credit rating agency. This debt rolls over frequently.
Use Credit Cards
Credit cards have very expensive interest rates, and funds are generally only available in modest amounts. However, if your margins are quite high, then it may be possible to pay the interest on these cards. Some entrepreneurs have used a number of credit cards to initially fund their businesses.
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Require Customer Advances
It may be possible to successfully alter customer payment terms to require customers to pay all or a portion of their ordered amounts in advance. However, this approach can also send customers toward competitors who offer looser credit terms.
Offer Early Payment Discounts
You can offer an early payment discount to customers, though the interest rate tends to be quite high. Another concern here is that some customers may take the discount and still pay on their normal terms, so that you do not have access to cash any earlier, and also have to badger these customers for the return of the discount.
Enter Into a Factoring Arrangement
Factoring is funding based on accounts receivable. Decidedly expensive, but it can dramatically accelerate cash flows.
Use Field Warehouse Financing
Field warehouse financing is based on inventory levels. It requires detailed inventory tracking, and is more expensive than the prime borrowing rate.
Use Floor Planning
Floor planning is funding based on inventory held by a retailer. Requires detailed inventory tracking, and is more expensive than the prime borrowing rate.
Reduce Inventory Levels
One of the best forms of short-term financing is to tie up fewer funds in inventory, which requires considerable attention to the management of inventory.
Obtain a Lease
A lease is specific funding that is tied to an asset, which is the collateral for the lease. The term can cover multiple years, and the interest rate can vary from near the prime rate to excessively high.
Obtain a Line of Credit
A line of credit is short term general funding that may require assets for collateral. Cost can be near the prime rate, but is closely monitored by the lender.
Securitize Receivables
The securitization of receivables is inexpensive, but only available to large firms with a broad base of quality receivables.
Enter Into a Sale and Leaseback Arrangement
Selling a property and leasing it back can result in immediate large cash receipt in exchange for a long-term lease commitment.
Of the short term sources of funds noted above, the best are generated internally through the close management of accounts receivable and inventory. Keeping these assets at a minimal level reduces your need for working capital, and hence your need for funds.
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