Short Term - Finanacing Alternative And Working Capital

By Author: Sadie Hurst
Total Articles: 17
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A short-term financing alternative generally refers to business funding options that do not include traditional loans. Businesses usually seek out alternative financing when immediate working capital is needed for day-to-day operating expenses. These alternatives offer many benefits over traditional financing options.

One short-term financing alternative is factoring. Factoring means that a business sells its accounts receivables at a discount to another company. This company, called the factor, usually requires businesses to have been and currently be processing credit card orders. Most applications are quick and easy to fill out, allowing businesses to get the capital they need immediately. Once a business has been approved, the factor sends the funds needed. The factor then receives the payments on the accounts receivables for a specified amount of time.

Overdrafts are another short-term financing alternative. Banks usually offer overdrafts, which allow individuals to borrow up to a certain amount of money and only pay a set interest on the amount overdrawn. Individuals must go through the bank they have an ...
... account with in order to set up an overdraft account. Overdrafts are only recommended as sources for short-term capital, as they can cost more than a long-term loan. Credit limits have to be reset periodically, and exceeding the credit limit can subject a borrower to additional fees. Overdrafts are secured by a borrower's assets; therefore, the bank can seize that collateral if the individual exceeds the credit limit or fails to make payments.

Short-term working capital refers to the funds needed to operate a business on a day-to-day basis. Businesses need cash to supply inventory and supplies, pay employees, and pay bills, including rent, utility, and loan payments. Working capital usually comes from revenue generated by sales. However, when a business is in need of additional funding, it can turn to financial companies for loans or advances.

A business can implement various management strategies in order to increase short-term working capital and to decrease the need for additional loans. One option is to give customers a discount for paying early, or charge a fee for late payments. This gives clients a reason to pay their accounts as soon as possible. Since most short-term capital comes from revenue, the quicker customers pay off their accounts, the more money a business has at hand. It's also important to confront customers who have outstanding accounts.

A business can also improve its short-term working capital by reevaluating its employee management. Business owners might consider hiring temporary or part-time employees to save money. If the need arises, it is easier to lay off temporary and part-time workers than it is to lay off a full-time permanent worker. Instead of hiring many employees to handle few responsibilities, a business owner might give existing employees more responsibilities. For example, an owner could give the secretary or assistant the duty of maintaining inventory.

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