Short-Term Financing: Definition, Types, Advantages & Disadvantages

 Financing is the core element of running any firm or business properly without financing, none of your firm plans or business plans can be executed. There are different types of financing options available in the market which are from various sources. The repayment and the interest of the financing depend on the type of financing you are opting for. There are two different types of financing: long-term and short-term financing. Here we will be discussing short-term financing, its sources, advantages, and disadvantages.

What is short-term financing?

Short-term financing refers to an amount or sum which is repayable on demand or within a year. In more simple words, whenever you are in search of capital trance the requirements of your firm and its maintenance for a short period, the financing option you choose at this point is known as short-term financing. Generally, short-term financing has to be repaid within a year to the lender. Such types of financing options generally opt when you are in search of a small number of loans for a short period and now discuss all the major sources for short-term financing. 

Sources of short-term financing

Numerous sources can provide you short term financing services and among them, we will be discussing the major sources over here:

1.Commercial Banks

The very first loans provider for short-term financing is the commercial banks. You can easily get the financing for a short time from the commercial banks with their fixed interest after the submission of all the required documents. But always remember, commercial banks offer loans based on your credit score. The commercial banks will generally provide you with two types of credit i.e., secured and unsecured. Unsecured means the credits which are not secured by the collateral securities and the secured one means the one which is covered with collateral. You can either get a single loan after signing a promissory note or by the line of credit. 

2.Advance from customers

In many of the firms, the owners can make the customers pay the credits or their payments in advance so that it would help in fulfilling the cost for which the firm requires the financing and within some days the firm can pay off the money in the form of the service to the customers.

3.Public Deposits

Many of the companies accept public deposits as short-term needs. It is also considered a risky investment but investors can still earn high returns on public deposits, even if the deposits are either secured or unsecured loans as offered by the company.

4.Trade Credit

You might have heard of the account payable which is also known as the trade credit. Whenever a credit purchase is made, account payable or trade credit is the credit drawn out by one seller to another. This source is beneficial to supply goods without immediate payment of cash. This way is widely being used by business firms as the source of short-term financing. In this way, the amount of the trade credit depends upon the buying units for which the credit is available. In some of the cases to avoid any kind of risk, the supplier uses promissory notes or bills of exchange.

Advantages of short-term financing

Short-term financing is now one of the most opted options for small firm owners or small business owners. People generally go for it because of the several advantages of short-term financing and here we will be learning about a few of those.

1.Low risk

As compared to long-term financing, short-term financing is less risky since the loan is granted for a short period. 

2.On-demand

To obtain a big loan or long-term financing, you always have to visit a lot of offices, get a lot of paperwork done, and still take a long time to finance your work. But the short-term financing is always on demand and even you can achieve it as soon as you demand it. Creditors are always ready to provide the short-term loan as they get quite a good interest amount on time whereas the long term is somewhat risky for them.

3.Less paperwork

Short-term loans are easily available with fewer paperwork requirements since the repayment has to be done in a short time so the lender doesn't ask you to get a lot of paperwork done. This is also the reason behind how short-term financing is easily available.

The disadvantage of short-term financing

Although short-term financing options have tremendous advantages, behind those advantages some of the drawbacks hide too. Short-term financing is generally offered with a high amount of interest. Since the borrower wants an instant loan the lender offers it with a high-interest rate so you need to pay more interest as compared to the long-term financing. Apart from this, when you opt for short-term financing, you get less time to repay and many firms or businesses fail to create the profit in that restricted period and hence face bankruptcy. In the short short-term, you need to pay high penalties for the late repayment so you need to plan to repay as soon as possible. These short-term financing options are easy to achieve and hence creates a habit or a cycle of borrowing whose repayment will be ultimately impossible.

Concluding Thoughts

Hence, so far we have learned almost every important information regarding short-term financing. We learn that the finance or capital need which is for a short period of about 1 year is known as short term capital need which can be sourced by different sectors such as trade credit, commercial banks, public deposits, etc. the short term financing is easily available in any of the mentioned sources. Even though you don’t have to bother much about this type of financing, the one thing you must consider is the last date for the repayment.