Two Types of Short-Term Financing Strategies
Order ID 53563633773 Type Essay Writer Level Masters Style APA Sources/References 4 Perfect Number of Pages to Order 5-10 Pages
Two Types of Short-Term Financing Strategies
Two types of short-term financing strategies used by businesses are loans (secured and unsecured) and trade credits. Unsecured loans are issued based on the creditworthiness of a borrower, so they typically hold a higher interest rate since the lender is issuing the loan based on the idea of a promise to pay. Secured loans are issued to the borrower with some type of lien or collateral (such as inventory), meaning if the loan defaults, the lender can use the assets to repay the loan (Majaski, 2020). Generally, unsecured loans are preferred over secured loans. An unsecured loan typically has a higher interest rate than a secured loan; however, since the loan is not backed by collateral, it may be easier for firms to obtain additional lines of credit with less secured debt (Guerard & Schwartz, 2007). However, secured loans may be a good source of funding for new businesses, since they may not have enough creditworthiness to quality for an unsecured loan.
Trade credits allow the firm to purchase goods without making an upfront payment. This would be reflected as an accounts payable transaction for the supplier of the goods. The purchaser and supplier come up with terms, which indicate length of time before payment is due and any applicable discount if payment is received early (Guerard & Schwartz, 2007). The benefits of this are that is can be a cheap source of funding for the firm, since no interest or penalties are paid if payment is received on time. A downside is that trade credits may not be available for all goods and services that a firm may need.
Guerard, J. and Schwartz, E. (2007). Quantitative Corporate Finance. Springer Science + Business Media, LLC.
Majaski, C. (2020 Mar 5). Unsecured vs. Secured Debts: What’s the difference? Retrieved from https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp
For short term financing there are many options such as, a line of credit, overdraft protection, invoice financing, and angel investors. The two that I chose for this form to discuss is invoice financing and angel investors.
Invoice financing is when a business uses an outstanding invoice as their collateral. The way this works is a business has an invoice they are awaiting a customer to pay however the business needs the cash now and a lender finances the outstanding invoice. The pros of invoice financing are that the funding is quick, the repayment is either 12 or 24 weeks, the business receives 100% of the invoice amount and customers still pay the invoice to the business so it is discreet. The cons of this are that sometimes there are specific software’s that are needed, businesses need to have a healthy financial track record, and the business is limited to the amount of the invoice.
Angel investors are much different than a loan or financing. This is person that has the cash on hand and the want to invest in a company. The pros to an angel investor are that they bring money to the business, there are no monthly payments, and they offer help, support and guidance. The cons of angel investing are that they require business equity, their vision may be different, and some of the decision-making power is taken away.
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