The day-to-day operations that keep firms afloat necessitate cash. Wages, salaries, purchases, machine maintenance, debts, and other expenses are all common business operations that necessitate spending to keep businesses afloat. These are short-term financial obligations or operating expenses that must be satisfied when they are due. In this article, you will get to know the 7 ways you can get short-term funding for your small business.
Businesses, on the other hand, find it difficult to meet financial responsibilities during periods of poor sales. The solution to this dilemma is short-term borrowing (debts repayable within a year).
Seven (7) Short-Term Funding Sources for your Business
There are seven short-term financial options available to help you run your small business during a funding crunch. These are some of them:
1. Acceptance Credit
This is referred to as “bankers’ acceptance.” It is a circumstance in which a bank guarantees to repay a debt if the debtor is unable to do so by the due date.
Businesses borrow at a discount from discount-houses in the money market using the banker’s acceptance guaranteed by their banks. In Nigeria, for example, a company can accept N90, 000 in exchange for a banker’s acceptance having a face value of N100, 000. That’s a ten percent save.
To give the funds, the lender relies on the creditworthiness of the accepting bank.
2. Trade Credit
When a company receives items on credit from a supplier, it is known as trade credit. The payment is made on a later agreed-upon date in accordance with the invoice’s terms.
The company does not charge interest on the credit card. Company also does not sign any formal documents to show that it is in debt. The transaction is built on a long-term excellent connection between the company and the supplier.
Trade credits reduce the difficulties of borrowing from banks in Nigeria and most African countries.
3. Banks Credits
This is also referred to as a “bank overdraft.” It occurs when a bank permits a business to overdraw its current account for working capital purposes up to a certain limit.
The bank normally grants the overdraft based on the strength of the customer’s cash flow. Only the amount spent by the consumer is charged interest. The contract is for a 12-month period, however it can be renewed.
4. Bills Purchase
Bills discounting is another term for buying bills. When a company sells its bill to a bank at a discount, this is what happens. Before going to the bank, the company gets the bill pre-endorsed by its customer as proof of debt. Read also How To Apply For NYSC Business Loan (2021)
Before accepting the bill, the bank checks the debtor’s credit rating. At the end of the term, the bank receives the whole amount due on the bill from the debtor.
5. Letter of Credit
This is true in international business when a foreign supplier requires the buyer’s bank to guarantee payment of the bill if the buyer fails to pay on time.
The bank only issues letters of credit to customers who have a strong credit history.
6. Deferred of Income
In the process of doing business, a company may be paid for goods and services it promises to provide in the future. Deferred income is a type of payment that the company uses as a short-term source of money before completing a supply.
As a result, the company records this transaction as a debt until the buyer receives the goods and services.
It is a convenient source of short-term finance, similar to trade credit. There isn’t any interest, and there aren’t any cumbersome paperwork to deal with. Find out about Legitimate Online Businesses in Nigeria – No.6 Will Earn You 200k Monthly
7. Accrued Expenses
These are debts for services that the company has already received but has yet to pay for. Salaries, loan interest, and taxes are examples of incurred expenses. Employees provide services before being paid. Interest and taxes are also paid on a regular basis.
The company uses deferred expenses as a source of short-term liquidity without paying interest.
When a company’s working capital requirements aren’t met, it turns to short-term financing to keep operations running. The seven short-term financing options discussed above will help firms in times of need.
Conclusion
To minimise payback problems, the company should be cautious with borrowed funds.
Source: Nyscinfo