Short term finance

• Short-term finance: This provides the working capital needed by businesses for day-to-day operations. Shortages of cash in the short term can be overcome in three main ways.
• Overdrafts: These are arranged by a bank.

  Advantages:

  • The bank gives the business the right to ‘overdrawn’ its bank account.
  • The business could use this finance to pay wages or suppliers.
  • The overdraft will vary each month with the needs of the business
  • Interest will be paid only on the amount overdrawn.
  • Overdrafts can be cheaper than short-term loans.

  Disadvantages:

  • Interest rates are variable, unlike most loans which have fixed interest rates.
  • The bank can ask for the overdraft to be repaid at very short notice.
• Trade credit: This is when a business delays paying its suppliers, which leaves the business in a better cash position.

  Advantages:

  • It is almost an interest-free loan to the business for the length of time that payment is delayed for.

  Disadvantages:

  • The supplier may refuse to give discounts or even refuse to supply any more goods if payment is not made quickly.