Short term sources of finance are quite 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 very hard conditions. There is not enough flow of cash in the business and therefore there is need to borrow in order to stay afloat. This article therefore addresses the best places where a company can secure finance from to facilitate smooth operations.
What is short term sources of finance?
Short term sources of finance are majorly characterized by their repayment period being 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 major sources of short term finance.
The first one is secured short term source of finance which requires one to present assets before them receiving finance. While 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 major 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 delivered. For instance if I deal with buying and selling of building materials and I lack enough funds to stock my business in order 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 largely dependent 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 major short of short term financing that happens during the normal course of business transaction. Most manufacturers have adopted this form as a result of the high competition being experienced all over. What this source of financing involves is that the supplier will offer to deliver goods or services to their customer on credit.
However, it is very important that as the buyer that you be very credit worthy for the buyer to trust that once you are able to 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 MOU’s with companies to either allow overdraft or extend loans to them as and when needed.
However, it is important to understand that commercial bank financing may come in many forms and shapes. It may be in form of a loan, discounting & Purchase bills or even in form of overdrafts as I had mentioned earlier.
Read More: List of Co-operative Bank of Kenya loans
4. Commercial papers
If your company has a high credit rating, then commercial papers may be a very 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 financing is only available for use by large firms that have very good credit rating.
Accruals are expenses which 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 that they have to paid. Some of the major 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 in order to receive financing to ensure continuity of business or any other institution.
This method of short term financing is not very common despite the fact that it is a good source of financing.