Short Term Financing

Published: 2021-06-29 06:57:05
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Category: Business

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Short-term financing is a financial plan that last for up to one year. Short-term financing has a lower rate of interest than does long term financing. With having a low interest rate, short term loans are good for raw material, salaries, and day-to-day expenses. However, with short-term loans, it is quite easy to max them out so if an emergency were to occur, the company would then have to take out a long-term loan. Taking out a long-term loan for a petty amount will lead to a higher interest, and excess payments. There are different sources or types of short-term loans that are available: trade credit, bank credit, customers' advances, and installment credit.
Trade credit or accounts payable is an agreement between the customer and company on receiving and paying for product. With trade credit, the customer receives the product, and later pays the company. Usually the payment date is between 30 and 60 days; however, some companies like jewelers will have an extended credit up to 180 days.
Bank credit is given when a commercial bank grants money to a business by means of loans, cash credit, and overdraft. Loans are a certain amount of money expected to be paid back with interest within a specific period. Cash credit is an arrangement when a borrower is allowed to withdrawal, payback, and withdrawal again. With a cash credit, there is a limit on how much money can be withdrawn, and interest is only charged to the amount withdrawn, not the cash credit limit. Overdraft is when an account holder spends more than in their checking account, the bank covers the difference and withdrawals money when the account is positive, and charges a fee for every time an overdraft occurs.
Customers' advances are when a customer pays for product or service before the product or service has been provided.
Installment credit is similar to a loan; however, the customer does not ask for a specific amount of money. Installment credit is when a customer purchases a television but does not pay the full price right away. By doing this, the customer has agreed to pay off the television on a fixed number of payments.

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