The capital required to start a business is termed as business finance. The sources of finance in a business can be either short term or long-term. Short term finance refers to the one that allows borrowing or lending of the funds for a short tenure like for one year or even lesser than that. This process is also known as working capital that signifies the excess of current assets over current liabilities. This usually involves financing in short-term securities for increasing inventory, paying payroll, paying for daily supplies and other working capital requirements that someone’s business might have at any point in time.

Short Term Finance

Advantages of Short Term Finance

1. The opportunity to increase the working capital to fulfill the primary needs 
2. To solve the primary tasks like covering the current deficit, paying taxes, debts or wages 
3. The flexibility of using the funds at the time of maturity (applicable to a certain type of loans) 
4. This is meant to rationalize the usage of borrowed resources, timely return etc. 
5. Minimum requirement of documents for short-term loans and speedy action 
6. An absence of strict requirement of credit history, income confirming certificate etc. 

Sources of short term financing

• Trade Credit
• Commercial loans
• Commercial paper
• Secured loans
• Bank overdraft
• Leasing
• Credit Cards 

Methods of Short Term Financing

1. Cash Credit: This is more popularly known as the ‘Working Capital Credit’, that is a short term loan given to a business to meet with their need of working capital requirement for the calendar year or budget year. The company can continue withdraw cash from the bank till the time they reach the credit limit. Credit limits can vary depending on aspects like stock and bond value, history of payment lapse and schedule of repayment. 

2. Packing Credit: This credit is provided to exporters to help them in the collection of raw materials, manufacturing and packaging and transportation of the same. In comparison to cash credit, the interest rate, in this case, is lesser but the repayment time is 90 days. 

3. Bank Overdraft: This is a short term finance facility where a person can draw money from his / her account even after his / her balance reduces to zero. Though the negative balance is charged with interest by the bank.

Short Term Finance

Disadvantages of Short-term finance

1. Perception of poor financial health - If your business suddenly needs money then the presence of short-term loan can make it appear as if your business is undergoing a financial crisis. Apart from this, the presence of short loan often acts as a hindrance to the approval of a long-term loan for your business. So, it might seem to the investors of your business that your business is frail and undergoing loss.   
2. Negative Credit Risk Assessments - The late payment on the short term finance can have a real negative impact on the credit rating or credit risk assessment. 
3. Insufficient long-term goals – Short-term financing solutions are no way made for the long-term goals. So, for new business ventures, this type of loan is not recommended. 
4. Strain on business owners- Sometimes the money lent to the small business owners have strict penalties due to late payments and this increases the interest rate at an immense level, making it strenuous for businesses.