There are numerous occasions where businesses and corporations need financial assistance. When the need arises they have multiple avenues from which to draw funds and one of the most common ones is through short term finance solutions.
In short term financing there are three types of temporary finance solutions; short term loans, trade credit, and commercial paper. Loans and trade credit can be utilized by any corporation or business but, out of the three, commercial paper is the most unique and complex type of temporary finance solutions.
Commercial paper is a short term financial solution in the form of a promissory note given out to only businesses and corporations with excellent credit ratings. These have been utilized by corporations since at least the 19th century and have been used by many. Goldman Sachs, which is a multinational investment and securities corporation, started trading commercial paper in the mid 1800’s began its ascent in the financial world that way.
As of Aug. 24, 2011 the total amount of financial commercial paper taken out as a form of short term finance was 543.9 billion dollars, while amount of asset-backed commercial paper taken out 396.6 billion dollars. Short term finance solutions are what fuels our financial system and keeps businesses and corporations thriving. As you can see there are two different types of commercial paper; regular and asset based.
Using assets as a basis for short term financial solutions is one of the most popular methods because it ensures that the bank or company that is loaning the money gets their money back even if the person who borrowed it defaulted on the payment. For short term financing, assets can be anything that is agreed upon by the person loaning the money; whether that be accounts receivable, inventory, or even equipment. However, with commercial paper, most people don’t use assets to back up their short term finance.
There are a lot of advantages when it comes to using commercial paper as a form of short term financing. As with most temporary financing solutions, commercial paper is generally for one year and then the money has to be repaid. This is excellent because it avoids all of those fees and other negative features that accompany lines of credit given by banks. On top of that commercial paper can be traded and it doesn’t create any sort of lien on the company.
Despite all of the positive features, there are several negative points that corporations should be wary of when looking at commercial paper as their short term finance solution. The major downside to commercial paper is that it is only available to companies with high credit, meaning that others will have to rely on loans and other forms of temporary financing. On top of that there is a lot of control that is exercised when commercial paper is issued and many companies find that they still need a stand-by line of credit just in case something happens.
Commercial paper is an exclusive form of short term financing. It has numerous positive features and has been utilized since the early 19th century. Companies looking for commercial paper will have to have outstanding credit and will also need to weigh the negative features to see if it is the right financial move for their company.

When it comes to financing solutions, there are numerous avenues from which companies and corporations can draw funds from. The two main types of financing solutions are short term financing and long term financing. Each of these has unique features, and specific requirements that companies need to be aware of when they are looking for funding. There are several major ways in which short term finance and long term finance; uses, fees and other miscellaneous features, length of time on repayment, and variations in financing methods.
Short term financing is one of the most common ways for corporations and businesses to receive funding since it is a smaller amount of money, generally, that can be used on a wide variety of needs. A lot of companies use temporary financing solutions to replenish stock when the demand is high, that way they can capitalize on the current demand rather than wait for their revenue to build up so they can purchase the inventory at a later date. Long term financing can be used to pay off a substantial amount of debt, expand the company, increase facilities, or do large construction projects.
When it comes to fees and interest on the borrowed money, you will find that with short term financing solutions, the fees are significantly less than with the long term solutions. This is because companies tack on a lot of interest due to the extensive length of time on long term financing. In short term financing, commercial paper is one of the solutions that incurs the least amount of fees and interest, but unfortunately this is only for corporations with excellent credit.
The repayment time on these two types of financing solutions vary drastically. With short term financing, the money is generally due within one year, however it can be sooner than that depending on the terms of the agreement. Long term financing, however, can be repaid in as many as thirty years, but this repayment time frame depends on the contract made with the people you are borrowing the funds from.
With each type of finance type, there are multiple methods that the funds are dispersed. There are three main types of short term financing methods; short-term loans, trade credit, and commercial paper. Short-term finance loans are a simple line of credit given by the bank or other financing company while trade credit is basically a deferment of payment. Commercial paper is a type of financing granted to corporations with outstanding credit only. In long term financing there are four main types of sources; shares, debentures, public deposits, and retained earnings.
When it comes to long term financing and short term financing there are numerous differences. It is incredibly important for a corporation or business to evaluate each carefully and also look at the various options of funding that are available to them. Choosing the wrong type of funding can be extremely detrimental to the company and lead to further financial distress.

As companies expand and are subjected to the rises and falls of the economy, they often times need additional funding to assist them when their financial situation is strained.  Short term financing is greatly preferred over long term financing by companies for a multitude of reasons; mainly because short term financing is easier to procure, generally cost less, and are excellent solutions when inventory runs low.
A popular reason for companies to apply for temporary financing is when the demand for their inventory is high and they cannot keep up the supply. Instead of waiting for their revenue to build up so they can purchase more inventory in the future, they will simply apply for short term financing so that they can capitalize on the current demand. Since these financing options are generally for only a year or less, the company can maximize their profits within that time frame with the extra money, and easily repay the money when it is due.
When giving out financial assistance, banks require assurance that their money will be repaid on time and when the full amount is due. They cannot solely rely on a business owner’s word since the economy rises and falls, and the future financial status of a company is unknown. Because of that, a business must offer some equal form of collateral as a security measure so they can receive their temporary funding.  Collateral can come in many forms but it must be something that the banker agrees upon. Several common forms of collateral used for include accounts receivable, and inventory.
Accounts receivable, commonly abbreviated as AR, is basically a term for money that is owed to the company by customers. This occurs when the customer purchased goods or services but has not yet paid for them. Since there is a legal obligation for the customers to repay that money, the company can actually borrow against the money that is owed to them and use that to secure their short term financing.  However the banks are aware that this amount fluxuates since the customers may not all pay in full; this is why banks will only pay you a portion of your accounts receivable. This is a safety measure which ensures that your collateral value doesn’t drop below the value of the you are receiving. When using AR as collateral for short term financing a bank will normally only allow you 70-75% of your AR amount.
When using inventory as collateral for short term financing a banker will look at the type of inventory that is being offered. The difficulty with using inventory as collateral is deciding on the actual value. Since the market fluxuates bankers will usually give you a fraction of the estimated value on your inventory. Another thing to keep in mind is that if the inventory is perishable, then they will give you an even smaller percentage for your loan.
When it comes to utilizing short term financing, many businesses prefer temporary sources rather than making any long term obligations. Since these short term advances cost less, are easier to procure, and are an excellent solution for inventory shortages, businesses prefer them over longer financing sources despite having to put up collateral as a security measure.

In the financial world loans can come in multiple lengths of terms from short, medium, and long term loans. Each loan variation has different requirements, regulations, and the repayment time and fees will vary as well. Most businesses and firms prefer to deal with short term financing solutions for a variety of reasons. Below we will discuss the advantages/disadvantages of short term financing, the three separate types of temporary financing solutions, and the collateral that can be used to secure the financing.
Short term financing should only be used if the business/firm is able to repay the full amount of the loan within the dictated timeframe. If more money is required for a much more extensive financial situation, then a longer loan should be taken out to allow the business adequate time to regain their money and repay the bank. These smaller financing options are easier to procure, and generally cost less making them excellent for businesses that need a temporary source of cash.
With short term financing there are three main types; short term loans, trade credit, and commercial paper. The short term loans are generally borrowed from the bank or other loan companies and their repayment period is generally one year or less. For short term loans you can take out a line of credit, something that you don’t have to ask for, or sign a legal promissory note which is basically an IOU stating when you will repay and the other stipulations of your loan agreement.
Trade credit is somewhat different and doesn’t involve banks but instead it involves your suppliers. With trade credit you can delay your payment, typically for only 30 days, but this comes with a cost. There may be interest that is charged which the business can pass onto their customers by increasing the prices, or they can take a lower profit cut, or a mixture of the two.
The third type of short term financing is commercial paper. This is generally issues by a corporation as a way to finance accounts receivable and inventories so that short term financial needs are met.  This debt is generally issued at a discount and is only available to large businesses with good credit
When applying for short term financing, many times collateral will be required in case the loan amount is not repaid. There are many different types of collateral, but when dealing with these temporary types of funding, then two main types of collateral come into play; accounts receivable and inventory. Accounts receivable is the money that is owed to that business by its customers. Since the customers are legally bound to repay the company, then the company can in turn use that as a means to apply for short term financing. Inventory is another piece of collateral that a business can use as a way to secure short term financing. However the type of inventory has a direct impact on how much can be taken out. Since some inventory is perishable, then banks will use only a fraction of the actual value as collateral on your loan.
As shown above, short term financing options are an excellent solution for businesses in a temporary bind. Depending on which financing option you choose, you’re repayment fees/times, collateral, and amount will vary, but with the right business strategy this loan can skyrocket your profits and lead to a huge success.