Short-term financing are loans that are borrowed to meet short-term business obligations comprising for few days to less than a year. Short-term financing mostly involves small amounts of money and organizations go for short-term financing to meet their liquidity thresholds (Raghavan & Mishra, 2011). The repayment period is short usually within one year. Examples of short-term loans include bank overdraft, commercial paper in the money market, payday loans, and credit cards among others. There are various strategies for short –term financing, however the paper will focus on aggressive strategy and matching strategy.
In aggressive short-term financing, the organization borrows short-term finances and uses them to finance some the permanent assets in the company. In this approach, the organization uses short-term finances to maintain its current assets as well which reflect on the current liabilities and bring balance in working capital. Some of the advantages of using this strategy include; the organization undergoes low cost of financing which is reflected in high levels of profitability because of low interest rates. There is lower carrying and handling cost of inventories, and lastly the company experiences high efficiency in working capital management due to a smooth operating cycle. The disadvantages include high levels of insolvency risk and lack of margins in the strategy leads to loss of opportunities and unexpected shocks in sales.
Delegate your assignment to our experts and they will do the rest.
The matching strategy in short-term financing entails the organization matching the current assets with the expected life of the short-term funds sourced to finance the assets. In matching strategy, the finds are obtained on the risk profiles and cash flow requirements of individual current assets. Advantages of the strategy are good levels of liquidity in the company, optimal use of resources, savings on interest rates and no refinancing risks. The disadvantages include, they still possess few risks, and it is difficult to implement.
References
Raghavan, N. S., & Mishra, V. K. (2011). Short-term financing in cash constrained supply chain. International Journal of Production Economics, 134(2), 407-412.
Robichek, A. A., Teichroew, D., & Jones, J. M. (1965). Optimal short term financing decision. Management Science , 12 (1), 1-36.
