Short term sources of funds

There are a variety of short term sources of funds available to a company, which require varying levels of collateral, personal guarantees, and interest expense. Here is a listing of potential sources of short term funds:

  • Accounts payable delays. You can delay paying suppliers, but they may eventually retaliate with higher prices or a lower order priority. This is essentially an interest-free loan, but can only be used with care.
  • Accounts receivable collections. You can add staff and use a variety of procedures to accelerate the payment of accounts receivable by customers.
  • Commercial paper. Quite inexpensive, but only available to large firms with a high rating from a credit rating agency.
  • Credit cards. Very expensive interest rates, and funds are generally only available in modest amounts.
  • Customer advances. It may be possible to successfully alter customer payment terms to require customers to pay all or a portion of their ordered amounts in advance. However, this approach can also send customers toward competitors who offer looser credit terms.
  • Early payment discounts. You can offer an early payment discount to customers, though the interest rate tends to be quite high.
  • Factoring. Funding based on accounts receivable. Decidedly expensive, but it can dramatically accelerate cash flows.
  • Field warehouse financing. Funding based on inventory levels. Requires detailed inventory tracking, and is more expensive than the prime borrowing rate.
  • Floor planning. Funding based on inventory held by a retailer. Requires detailed inventory tracking, and is more expensive than the prime borrowing rate.
  • Inventory reduction. One of the best forms of short term financing is to tie up fewer funds in inventory, which requires considerable attention to the management of inventory.
  • Lease. Specific funding that is tied to an asset, which is the collateral for the lease. Term can cover multiple years, and the interest rate can vary from near the prime rate to excessively high.
  • Line of credit. Short term general funding that may require assets for collateral. Cost can be near the prime rate, but is closely monitored by the lender.
  • Receivables securitization. Inexpensive, but only available to large firms with a broad base of quality receivables.
  • Sale and leaseback. Can result in immediate large cash receipt in exchange for a long-term lease commitment.

Of the short term sources of funds noted above, the best are generated internally through the close management of accounts receivable and inventory. Keeping these assets at a minimal level reduces your need for working capital, and hence your need for funds.

Related Courses

Corporate Cash Management 
Corporate Finance 
Treasurer's Guidebook