Short Term

Short-Term Financing There are numerous diverse sources offered for short term financing which is significant for companies to go on with the corporation’s day-to-day procedures. The important sources for short-term financing are overdrafts, trade credit, and short-term loans. These sources can be used for many reasons. Installment loan is the most confusing financing loan which requires equal payments of the loan life (Block, Hirt, & Danielsen, 2009). A mortgage is an example of installment loan. Installment loans are usually given to those with bad credit and sometimes no credit. This type of loan has a higher interest rate. Short term loan or a small bank loan is a loan that is set to be paid by no more than a year. The bank loans are set for a small amount to be borrowed and a higher interest rate is imposed on the borrowed amount. “Bankers use either the prime rate or LIBOR as their base rate and add to that depending on the creditworthiness of the customer” (Block, Hirt, & Danielsen, 2009, p. 243). Short term loans can hurt the borrower’s credit score if not paid on time or paid. Net trade credit is an interest free short-term loan. Trade credit is used when there is a need for a larger use of resources. This type of loan is used when there is a need for raw materials. Trade credit has various payment terms but normally 30 to 90 days. “Approximately 40 percent of short term financing is in the form of accounts payable or trade credit” (Block, Hirt, & Danielsen, 2009, p. 225). Companies will use overdrafts and short term loans to receive help with cash flow, overdrawn accounts, and everyday operation. Customers will also use overdrafts and short term loans to borrow for a short period and to avoid higher bank charges and fluctuating interest rates. Many companies use trade credit because there are no interest rates, offer discounts, and are very helpful in keeping costs down.
Reference
Block, B. B., Hirt, G. A., & Danielsen, B. R. (2009).