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What are the Different Types of Short-Term Funding?

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  • Written By: Malcolm Tatum
  • Edited By: Bronwyn Harris
  • Last Modified Date: 16 November 2016
  • Copyright Protected:
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    Conjecture Corporation
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Short-term funding is usually defined as funding that is secured and repaid in full within one calendar year. Many businesses make use of this type of funding to finance new marketing projects, launch new products, or to makes improvements to existing facilities. When faced with the need for short-term financing, a business has several options that may be viable.

One of the more common approaches to short-term funding is the use of an established line of credit. With this solution, a financial institution extends a credit account to the business, making it possible to draw against the limit on that account when and as needed. Often, the interest rates on this type of financing are very competitive, and the monthly payments on the debt are usually minimal. For maximum flexibility, a line of credit is one of the best ways to create access to short-term funds on an ongoing basis.

Micro loans are another short-term funding solution. Loans of this type are usually for smaller amounts and have repayment terms that include a series of up to twelve monthly payments. Generally, a micro loan can be used for any purpose the business requires, and may not require the pledging of any collateral. While interest rates are not as competitive as those associated with a line of credit, the strategy is ideal when funding a project that is anticipated to post a return sooner rather than later.

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Factoring of the company receivables is another means of managing short-term funding. With this approach, a lender extends the business a percentage of the current outstanding receivables in the form of an advance loan. Payments on those receivables are received by the lender and applied to the company’s account. Once the majority of the outstanding receivables used to secure the loan have been received, the lender releases the remaining percentage of the face value of the receivables to the client, retaining roughly three to four percent as payment for the service.

Another workable strategy for short-term funding is a process known as a sale and leaseback. In this scenario, the business sells an asset for cash. The new owner leases the asset back to the original owner, who continues to enjoy use of the asset. While this approach to funding is workable, it is important to look into possible tax assessments connected with the arrangement. Depending on the tax regulations that are currently in force, the tax burden may minimize the benefit of pursuing this funding strategy.

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