Short-term financing

There are many ways to obtain short-term financing, ranging from unsecured bank loans to using accounts receivable or inventory as loan collateral. The credit card is perhaps the best-known source of short-term financing. How­ever, businesses use many other types of short-term financing to sustain their busi­ness operations.

Businesses rely on short-term financing from external sources for two reasons. The first is growth – profits may simply not be high enough to keep up with the rate at which the company is buying new assets. For example, a convenience store chain that wished to open one new store a month. If each new store cost $100,000 the company would have to be very profitable to be able to do this without obtaining external financing. The second reason that businesses rely on external short-term financing is choice. Rather than waiting to save enough money from net profits to make their de­sired purchases, many firms would rather borrow the money at the outset and make their purchases on time. People make the same choices in their personal lives. For example, you could save a little money each month until you saved enough to buy car on the cash basis. This might take a long time, however, and in the meantime you would be without transportation. Alternatively, you could borrow the money to buy the car, and have it to drive around while you're paying off the loan. People–and businesses–often choose the latter alternative. It is obvious that the ability to obtain external financing is crucial for most businesses. But without it, most businesses could never even get started.