What is Short Term Financing and Should You Use It?
Is short-term financing right for your business?
Short term in the financial world refers to an investment or financial plan held or lasting for one year or less.
Short term financing definition
Financing used over one year or less mainly for the purposes of increasing inventory, paying payroll, paying for daily supplies, and any other working capital needs your business may have.
Sources of short-term financing often include things like:
- Trade credit: given by your suppliers for the option to “buy now pay later” eg. inventory, materials, equipment.
- Commercial loans
- Commercial paper: unsecured debt issued by a corporation often for financing accounts receivable, inventory, and paying short-term liabilities
- Secured loans: often require collateral, with lower interest rates, and larger loan amounts than unsecured loans.
To compare then, long-term financing is often used for things considered to be assets, and for bigger projects. Some examples include:
- New equipment
- R&D (research and development)
- Cash flow enhancement
- Company expansion
A few long-term financing methods can include:
- Equity financing: preferred and common stock in a company. A negative with doing this is you’re giving up a piece of your ownership, control, and earnings.
- Corporate bond: similar to a government bond. This is issued by a business to raise money often for expansion purposes.
- Term Loan: These can range from intermediate, which are less than three years, and long-term which can range from 10 to 20 years. More about term loans.
If you’re not sure which option would provide you with the most benefits, contact WCM and our finance professionals will be happy to help you decide. You can also fill out our simple application to see if you qualify for additional funding for your growing business!