Short Term Financing

In: Business and Management

Submitted By murray1984
Words 286
Pages 2
There are many different types of short term financing including trade credit financing, Bank credit financing, and commercial paper financing. Trade credit financing is the most popular and includes approximately 40% of short term financing. Trade credit financing is when the seller of the goods gives an extended time for payment usually about 30-60 days, and can sometimes offer a cash discount. Businesses would choose this type of financing for the cash discount and because it does not have an interest rate. Bank credit financing usually prefers a self-liquidating loan because it ensures a built in repayment scheme. This is usually a 90-180 day agreement and the interest rate will vary depending on the customer’s credit risk. Also, this type of loan often requires a compensating balance requirement. Businesses would choose this form of lending if they need a longer time frame than trade credit or if they need things other than goods such as long term growth. Commercial paper financing is offered to large are prestigious firms and is issued at below the prime interest rate. This type of financing is a short term unsecured promissory note which does not have any compensating balance requirements. However, it does require the firm to maintain commercial bank lines of approved credit equal to the amount of outstanding paper, which is usually a lot lower than compensation balance requirements. Businesses would choose this loan over the others if they have the credit standings for the loan because it offers lower interest which is less money the company is spending. All of these ways to get financing are outstanding an owner has to choose which is best for the type of business they are…...

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