Short-term sources of finance are pretty varied. They range from getting loans from friends to getting unsecured loans from banks or even a Sacco. In this article, we will talk about everything you need to know about short-term sources of finance.
Most businesses at the moment are running under challenging conditions. There is not enough flow of cash in the industry, and therefore there is a need to borrow to stay afloat. This article thus addresses the best places where a company can secure finance to facilitate smooth operations.
What are short-term sources of finance?
Short-term sources of finance are majorly characterized by their repayment period is less than a year. A short-term source of finance is usually aimed at meeting the current needs of the business, such as paying wages or utility bills. There are two primary sources of short-term finance.
The first one is a secured short-term source of finance which requires one to present assets before receiving finance. At the same time, the other one is unsecured, whereby one only has to prove that they will be able to repay the loan and nothing else is needed.
Top Short Term Sources of Finance
The main significant ways which one could use to raise short term sources of finance include:
1. Deferred Income
Deferred income is a source of short-term financing whereby a business receives payment in advance before delivering the agreed-upon services or goods provided. For instance, if I deal with buying and selling of building materials and I lack enough funds to stock my business to complete some orders. If I’m using this method as a source of financing, I will go to one of my biggest customers, ask them to pay in advance, stock up my business, and then pay later.
All this is dependent mainly on the relationship that the seller has with the seller. Moreover, this method is cheap as one will not incur interest rates, although they may offer a small discount.
2. Trade credit
Trade credit is a significant short or short-term financing that happens during the ordinary course of business transactions. Most manufacturers have adopted this form due to the high competition being experienced all over. This source of financing involves that the supplier will offer to deliver goods or services to their customer on credit.
However, it is imperative that, as the buyer, you be very creditworthy for the buyer to trust that once you can repay, you will do so without fail.
3. Commercial banks loans
Most businesses are surviving this period with loans from commercial banks. Commercial loans are a huge source of short-term financing in Kenya. Most commercial banks in Kenya have signed MOUs with companies to either allow overdrafts or extend loans to them as and when needed.
However, it is essential to understand that commercial bank financing may come in many forms and shapes. As I had mentioned earlier, it may be in the form of a loan, discounting & Purchase bills, or even in the form of overdrafts.
4. Commercial papers
If your company has a high credit rating, then commercial papers may be a good source of short-term financing. This is whereby the company/business issues a promissory note for goods or services delivered. However, this mode of funding is only available for use by large firms with an excellent credit rating.
Accruals are expenses that a company owes to another. These expenses, however, are not yet paid because they are not due. However, the company acknowledges that it has them and must be produced. Some of the significant sources of business accruals include wages and salaries.
Moreover, accruals are interest-free sources of short-term financing for businesses.
Factoring is the opposite of trade credit. Here a business sells its accounts receivable at a discount. It may sell it to a bank to receive financing to ensure business continuity or any other institution.
This short-term financing method is not very common, even though it is a good funding source.