Personal Finance

PersonalFinance

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PersonalFinance

Shorttermfinancerefersto moneyborrowedby an organizationwhoserepaymentlastsforone yearora periodlessthan one year.In mostcases,short-termfinancingis usedto financethecapitalneedsof an organizationthat aretemporary.Thereare severalsourcesof short-termfinances,which may includebankoverdrafts, lease,creditcard,tradecredit,as wellas short-termbankloans.With shorttermfinance,organizationshavea chanceto undertakeopportunitiesthat may comeup in thecourseof businessoperations.Suchopportunitiesmay not havebeenanticipatedin thefinancialplanof thecompany.Thispaperevaluatesthedifferent typesofshorttermfinancingoptionsforbusinesses,as wellas theadvantagesanddisadvantagesof shorttermfinancing.In addition,thepaperwill highlight thealternativesto short-termfinancingin an organization.

Abankoverdraft refersto a creditextensionfrom a financialinstitutionthat provideslending services.With an overdraft arrangement,an organizationhasthecapacitytowithdrawamountsthat are beyond whatis in their bankaccount.Whileseekingthistypeof finance,thecreditgivento thebusinessorganizationwill be determinedby thelimitof overdraft thatthecompanyhas negotiatedwith thebank.One of themajoradvantageof bankoverdrafts is thattheyare quicksourcesof finance.Asa result,theyprovidea backupforcashflowwithin an organization.Itis easyto arrangeforan overdraft with abank,andittakesonlya shortperiodfortheoverdraft to beapprovedandprocessed(Besley andBrigham, 2011).

Anotheradvantageofferedby bankoverdrafts is flexibilitythisis becauseitis alwaysavailablewhenthebusinessneedsit,andthere are minimalcostsincurredin theprocessing of bankoverdrafts. Itcan be acquiredandusedto paysuppliers whilethebusinessis stillwaitingforcustomersto pay.Thisensuresthatcash-flowismaintainedwithin theorganization,anditis possibleto payforshort-termsupplies.Bankoverdrafts are alsoadvantageoussince theydonot havea fixedperiodof repayment.Therefore,an organizationcan undertakeotheractivitieswith littleworriesabout therepaymentof theoverdraft. Despite theadvantagesof bankoverdrafts, there are alsosomedisadvantagesassociatedwith overdrawing from a bankaccount.One of thelimitationsis thatthere are interestratesappliedon bankoverdrafts. Theinterestratesof overdrafts may be higherthan thoseof bankloans.Asa result,theybecomean expensivesourceof financingin organizations.In addition,chargescan be levied whentheamountwithdrawnis beyond theagreedlimitof overdraft (Pride et al, 2013).

Theotherdisadvantageof bankoverdrafts emanates from thefactthattheyneedto besecuredagainst assetsof theorganization.Thisposestheriskof theassets beingseizedin casetheorganizationis not in a positionto repaytheamountithas overdrawn. Bankoverdraft can alsoberecalledat anytimeby theorganization.Thismostlyhappensin instanceswherethere are nocleartermsandconditionsagreedbetween theorganizationandthelending institution.In addition,failureto makepaymentspromptlyas agreedmay contributeto recallof an overdraft. Breakingthetermsandconditionsagreedupon between thebusinessandthebankcan alsocontributeto recalling of a bankoverdraft. Anotherfactorthat can contributeto recalling of bankoverdrafts is a changein thepoliciesof abank,especiallywithregardtooverdrafts. Thus,theorganizationis not guaranteedthattheywill undertaketheprojectstheyintendedto financeusingbankoverdrafts,andthismay derailtheimplementation of projectsin an organization(Besley andBrigham, 2011).

Leasingis alsoanothersourceof short-termfinancingforbusinesses.Through a lease,abusinessusesa productdespite thefactitdoesnot ownthisproduct.In mostinstances,leasing entailshiringan asset tobe usedin theproducinggoodsandservices.With a leasearrangement,an organizationis supposedto be remittingsomemoney,which coversthefeeforhiringtheproduct.Whentheleaseperiodelapses, theleasing agencytakesback their product.Oneadvantagesof a leaseisthatitmakesitcheaperto acquirea productthan buythesameproduct.Thus,itoffersan alternativeforbusinessesthat donot have&nbspcashto purchasean asset. Leases are alsopreferablesince theyofferfixedratesof financingthisis becausethemonthlypaymentratesare uniform.Through leasing, theorganizationcan makemaximumuseof theequipmenttheyhaveacquired.Thisensuresachievement oftheorganizationalgoalsof production(Boobyer, 2004).

Asa sourceof short-termfinance,leases are not affectedby inflationthisis becausetheorganizationpaysa constantamountevenwhenthecostof conductingbusinessgoesupdueto inflation.In addition,poorperformanceof thebusinessdoesnot affecttheleasesince theleasing agencycannot imposenewchargesthat werenot statedin theleaseagreement.Leases are alsoessentialsince theyenhanceflexibility.Since there aresomeequipmentthat are requiredto undertakea certainproject,there is noneedto purchasesuchequipment.Rather,itis advisableto leasesince theequipmentwill beusedfora specifiedperiodafter which its useceases.In manycases,themaintenanceof theproductleasedis undertakenby theowner.Thus,thebusinessdoesnot incurextracostsof maintainingtheequipment(Boobyer, 2004).

Leasinghas its disadvantagesone of thelimitationsis thatan organizationis obligedto makepaymentsuntil theagreedtermcomes to an end.Thisimpliesthatbusinessesmay facerisks,especiallywhentheyencounterfinancialchallengesthat hinderthepaymentof leasefee.In addition,anorganizationhas to continuemakingpaymentsfortheproductevenwhentheprojectstheywereundertakinghas beencompletedbefore theleaseperiod.Businessesthatleaseare alsoat a disadvantageof havingnoequity.In orderto achieveequity,an organizationshould purchasetheequipment,andthiscan bedoneattheendof leaseterm,during whichtheproducthas undergonesignificantdepreciation.Based on thetermsoflease,theleasemay be obligedto maintaintheequipmentandincurcostsin repairingtheleasedequipment.Thiscan be an additionalexpenditureto thebusiness(Boobyer, 2004). Leasingalsocreateslaxityon thepartof thelease,andas a result,theymay not purchasetheir ownequipmentbecausethere is an optionof leasing. Thispreventsthebusinessfrom acquiringits ownassets.

Accordingto Pride et al (2013), short-termfinancingof a businesscan alsobe donethroughtradecreditthisentailslendinggoodsto an organizationfora specifiedperiodafter which theyare requiredto payfortheborrowedgoods.In mostcases,thecycleof tradecreditlastsfor28 dayshowever,there are someinstanceswherea businessmay takelongerto repaytheloan.Amajoradvantageof thisformof financingis its affordability. There are nocostsinvolvedsince thesuppliers applyitas a methodof attractingcustomers(traders).Thissourceof financegivestradersan opportunityto acquireproductsevenwhentheyhavelowcashbalances.Asa result,theygetcashwith which theycan payforcriticalneedsof thebusinessandfinancelong-term debtsat thesametime.Traderscan alsoacquirehugeamountsof stocksince theyare not payingin cashthisenablesthem to attractmanycustomerssince there is a constantsupplyof commodities.

Thepossibilityof tradersto incurhighcostsis one of thedisadvantagesassociatedwith tradecredit.There ishighprobabilitythattraderswill payhighcostsforinventorywhentheypurchasethrough creditcomparedto cashpayments.Althoughsuppliers offera discountfortraderswhopaywithin a shortperiodof about ten days,there are feeschargedforlatepayments.Interestalsoaccrueswhentraderspayfortheitemsacquiredwhentheagreed periodhas alreadyelapsed.Failureto payforthegoodsbytheagreedperiodmay alsoresulttolegalsuitsbetween thetraderandthevendor.Thiscan affecttheimageof thebusinessandputoff potentialcustomers(Gitman &amp McDaniel, 2008).

Creditcardis alsoanothersourceof short-termfinanceforbusinesses.Whengoodsare acquiredusingcreditcards,thetradercan waitfora certainperiodafter which theymakethepayment,eitherin fullorpartially.Through theuseof corporate creditcards,businessesare givendiscountsfortheproductstheypurchase.However,there are disadvantagesof usingcreditcards,especiallywhenthepaymentsarenot madein full.Thebusinessincurshighratesof interest(Pride et al, 2013).

Short-termbankloanscan alsobe anothersourceof financingforbusinessestheseloanshavetherepaymentperiodof lessthan one year.There are advantagesanddisadvantagesof usingshorttermloansin abusinesses.One of theadvantagesis thatthere are low-interestrateschargedonthetraderswhoborrowsuchloansfrom a bank.Comparedto otherformsof businessfinancingsuchas creditcards,shorttermloanstendto attractlowratesof interest,andthisimpliesthattheamountto berepaidwill be quitelow.Shorttermloansare alsoaccessiblewithin a shorttime.Whena businessappliesforsuchloans,theycan be givenafter a shortwhile,andthisallows themto makeanypaymentstheyintendedto makewithout delays.Althoughshort-term loansare beneficialforbusinesses,theyare at thesametimedisadvantageous. Thisis becausetheytendto be costlybecausethere can be variationsin theinterestrateschargedby banks.Interestratesvaryaccordingto theinflation,as wellas thetaxesimposedon banksby thegovernment(Gitman &amp McDaniel, 2008).

Sekhar(2009) contendsthatapartfrom borrowingmoneyfrom lenders,there are otheralternativesthatorganizationscan useto acquireshorttermfinances.One of themajoralternativesis thesaleof sharesandcompanystocks.Companiesmay opt to relinquisha certainpercentageof thecompanyownershipto thepublic.Thisway,theyraisequickcashthat can be usedto financeimmediateneeds.Sellingof companystocksis advantageoussince itdoesnot createnewdebt,which thecompanywill&nbsprepayin thefuture.Rather,thissourceof financinggivesorganizationsanopportunityto raiseextracapitalwithout attachingtheir assets orborrowingmoneyfrom lenders.Saleof companystocks,however,can be affectedby theprevailingpoliticalconditions.In addition,sellingstocksimpliesthatthebusinesswill losea certainpercentageof its ownershipto shareholders.

Factoringisalsoanothersourceof capitalthat can providealternativesto thetraditionallending methodsthatmostbusinessesare usedto. Thismethodentailstyingloanrepaymentsto themoneythatthecompanyexpectsto receive.Assuch,thecompanycan drawcashagainst invoicesthat havecash,which has not beenremittedby customers(Sekhar, 2009).

Inconclusion,short-termfinancesare acquiredto financebusinessoperationsthat requireimmediateattention.Short-termsourcesof financinghavea repaymentperiodof lessthan one year,orevena year.Thevarioussourcesof shorttermfinancingincludebankoverdrafts, leasing, tradecredit,creditcards,as wellas shorttermloans.Eachsourceof financinghas its advantagesanddisadvantages.Therefore,organizationshaveto be keenwhenchoosingtheformof shorttermfinanceto use.There are variousalternative sourcesof shorttermfinancing,which includethesaleof companystocksandfactoring. Whenan organizationhas exhaustedtheothersourcesof shorttermlending, theycan opt forthealternative sources.

References

Besley,S., &amp Brigham, E. F. (2011). Principlesof finance.Mason, Ohio: South-Western.

Boobyer,C. (2004). Leasingand asset finance: The comprehensive guide for practitioners.London: Euromoney Books.

Gitman,L. J., &amp McDaniel, C. D. (2008). Thefuture of business: The essentials.Mason, OH: Thomson South-Western.

Pride,W., Hughes, R. &amp Kapoor, J. (2013). Business.London:Cengage Learning.

Sekhar,G. V. S. (2009). Businesspolicy and strategic management.S.l.: I K International Publi.