Short-term funding is an activity to obtain funds or capital to finance a company's operational needs in a period of less than one year. Short-term funding is usually used to overcome liquidity problems, namely the company's ability to pay its short-term obligations. Short-term funding can also be used to take advantage of business opportunities that suddenly arise, such as getting discounts from suppliers, increasing inventory, or developing new products.
Short Term Funding Type
Short-term funding is a source of funds that must be paid back in less than one year. There are several types of short-term funding that companies can choose, including:
Bank loan
Is the most common way to get short-term funds. Companies can borrow money from banks by signing a loan agreement that includes interest, term, and collateral. Interest is a fee that the company must pay for the loan received. The term is the agreed time period for repaying the loan. Collateral is an asset that is used as collateral if the company fails to pay the loan. The advantage of bank loans is that they are easy and quick to obtain, and have relatively low interest. However, bank loans also have a risk of default, namely the company's inability to pay the loan according to the agreement, and requires sufficient collateral.
Commercial securities
Short-term debt securities issued by companies to investors. Commercial papers typically have maturities between 30 and 270 days, and have lower interest rates than bank loans. Interest is the compensation that a company must pay to investors for the commercial securities purchased. Maturity is the date on which a company must pay back the principal and interest on commercial securities. The advantage of commercial paper is that it is flexible and does not require collateral. However, commercial securities also have liquidity risk, namely the difficulty of selling them on the secondary market, namely the market where investors can buy and sell commercial securities before they mature.
Invoicing
The process of selling a company's receivables to a third party, usually a finance company or bank, at a certain discount. Receivables are a company's right to receive payment from customers for goods or services that have been provided. Discounts are price cuts given by third parties to companies to purchase their receivables. Invoicing can help companies get cash quickly without waiting for payment from customers. The advantages of invoicing are reducing the risk of default, namely the inability of customers to pay receivables according to the agreement, and increasing cash flow, namely the amount of money coming in and out of the company in a certain period. Invoicing also has quite high costs, namely the difference between the value of receivables and discounts given by third parties, and can reduce the company's reputation in the eyes of customers, because it is considered unable to manage its own finances.
Operational lease
This is a fixed asset rental agreement between the company and the asset provider. Fixed assets are tangible assets that are used in long-term company operations, such as machines, vehicles or buildings. Operating leases are usually short-term and can be terminated at any time by either party. The advantage of operational leasing is that it saves investment and asset maintenance costs, namely the costs that must be incurred by the company to purchase and maintain its fixed assets, as well as being flexible and easy to adjust to the company's needs. However, operational leases also have rental costs that are higher than the asset price, namely the costs that the company must pay to the asset provider to use its fixed assets within a certain period, and do not give the company ownership rights to the assets.
Benefits of Short Term Funding
Short-term funding has benefits for companies in managing their cash flow effectively and efficiently. Short-term funding can help companies:
Helps overcome the gap between receipt and expenditure of money
For example, if a company has outstanding receivables or unsold inventory, it may use short-term financing to cover its cash shortfall. That way, the company can maintain its liquidity and avoid financial difficulties.
Provides flexibility to take advantage of business opportunities that suddenly arise
For example, if a company has the opportunity to expand the market or develop new products, the company can use short-term funding to fund these projects without having to wait for the results of existing business activities. That way, companies can increase their competitiveness and expand their market share.
Increase company profitability by minimizing capital costs
Capital costs are costs that must be incurred by a company to obtain funds, both from internal and external sources. Short-term funding usually has a lower cost of capital than long-term funding, because the payback period is shorter and the risk is lower. That way, companies can save capital costs and increase their profits. Apart from that, short-term funding can also reduce the interest burden and installments that the company must pay.
Short Term Funding Risks
Short-term funding is a source of funds that a company uses to meet its operational needs in less than one year. Short-term funding can come from bank loans, commercial paper, trade debt, or asset sales. If not managed well, short-term funding can pose risks for the company, including:
Liquidity risk
This risk occurs if the company is unable to pay its short-term obligations on time due to a lack of cash. This can disrupt the company's smooth operations and damage its reputation in the eyes of external parties.
Interest risk
This risk occurs if short-term loan interest rates rise suddenly and significantly, thereby increasing the company's interest expense. This can reduce company profits and reduce its ability to pay debts.
Foreign exchange risk
This risk occurs if the company makes short-term loans in foreign currencies that fluctuate against the local currency. This can cause exchange losses if the foreign currency exchange rate weakens against the local currency when the loan matures.
Credit risk
This risk occurs if the party providing a short-term loan to the company experiences financial difficulties or fails to pay, so that the company cannot get the expected funds. This can result in a lack of working capital and difficulty financing business activities.
Therefore, companies must be able to determine the source, amount and timing of short-term funding that suits their needs and capabilities. Companies must also be able to measure and compare the costs and benefits of each available short-term funding option. Thus, companies can utilize short-term funding as a tool to achieve their business goals optimally.
