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Business Finance


Short Term Finance

Published Date 31st January 2007

What is it?

Short Term finance or debt is most commonly used to fund assets that turn over quickly such as stock or debtors. To fund your business in the short term, you can:

  1. borrow from the bank through an overdraft or using the Company/Business Visa card,
  2. borrow from your creditors by negotiating longer credit terms or cash lines or
  3. borrow on the strength of monies owed to you through invoice discounting or factoring.

These are all sources which can be used to generate working capital, i.e. the money that you need for the day-to-day running of your enterprise.

Short Term Financing Options

All these sources of finance are quite simple to set up and relatively inexpensive provided that they are short-term solutions only. They should not be relied upon in the long term as they could be very expensive. A brief outline of the various methods is given below:

1. Overdraft

An overdraft is one of the most commonly used methods of financing a business. If you have a short term need for cash an overdraft is likely to meet your requirements best. An overdraft facility can be quickly arranged and when in place it will give your company the flexibility to borrow without notice up to the approved amount. In addition you will pay interest only on the amount borrowed. An overdraft is a versatile and flexible source of working capital, which can fluctuate to meet your requirements during different seasons or different stages of the month or quarter.

Overdrafts should never be used to meet long term needs. They are unsuitable for this type of borrowing as they are repayable on demand and therefore not necessarily a stable platform on which to build your business. Overdrafts can also be more expensive than longer term options.

Overdrafts should be used to meet day-to-day requirements of your business, such as paying bills, wages and purchasing stock. They are ideal when the demands on your finances are uneven and your account is likely to move in and out of credit on a regular basis.

2. Company/Business Visa Card

A company credit card allows you to clearly separate business and personal expenses and enables you to carry out transactions over the phone and the internet. Credit cards are a flexible and convenient short-term means of paying bills and making purchases.

When you apply for a card the issuer will agree a suitable credit limit with you that can meet your monthly spending requirements. For ease of use a direct debit will be set up on your account to repay the monthly expenditure. If you want to avoid interest charges you have to repay the outstanding amount on the card in full at the end of every month.

Itemised billing will help you to analyse your spending patterns quickly and clearly. It will also help you to monitor and track the spending of employees that you have authorised to have cards. Provided the bank/credit card issuer is part of one of the globally recognised major credit card networks i.e. Visa or MasterCard, making international payments is a simple process. Further information on First Trust Bank?s business and personal credit cards is available on this site.

3. Credit Lines

You will be able to optimise your working capital position if you pay great attention to the credit that your creditors are allowing you and the amount of credit that you allow your debtors. If a situation arises where your suppliers offer short credit terms (say 13 days) while your business offers longer credit terms to purchasers (e.g 30 days) or does not chase up outstanding invoices efficiently, the amount of working capital available will quickly disappear. In effect, your customers will be borrowing money at your expense.

If you develop a good relationship with your suppliers you should be able to negotiate favourable credit terms. If possible you should try to establish credit terms with your suppliers which allow you to cover the time taken by the majority of your customers to pay you.

You should also look at the credit terms you offer to your debtors. It is essential that every business knows precisely who owes them money, how much is owed and for how long the debt has been outstanding. The reality is that if you do not manage your debtors tightly they will take advantage of the position by paying late. Tight management of debtors will ensure you have money coming in throughout the year. You also need to look at your business practices in comparison with what your competitors are doing. What terms and discounts for prompt payments do your competitors offer? Are your terms too generous?

If a debtor starts to display late payment trends a face to face meeting as soon as the matter comes to your attention will help you to spot and deal with problems early.

4. Invoice Discounting

Invoice Discounting is a working capital facility, which enables you to turn a percentage of your outstanding invoices into immediate cash. The balance is repaid (less costs) as the debtor collections are received. In short, Invoice Discounting allows you to accelerate your cash flow.

The responsibility for managing the debtors remains with you. You retain control over how your customers are handled and continue to operate your sales ledger.

Invoice Discounting can also help growing businesses finance their expanding working capital requirement. As sales increase, debtors increase, and the level of working capital grows proportionately. An Invoice Discounting facility will allow additional funds to be drawn down based on new sales.

5. Factoring

If you sell on credit, it is likely that some of your customers will not pay promptly after receiving goods or services, or, unfortunately, that some will fail to honour their debts completely. Slow payments and bad debts have serious consequences for your business' cash flow, especially if it is growing rapidly and has reached the limit of its overdraft facility. A solution which may allow you to realise additional cash, is Factoring.

When you utilise a Factoring facility you sell your debtors at a discount. While you will not receive the full amount owed to you, you have a guaranteed inflow of cash. There are different forms of Factoring some of which do not require the debtor be made aware that a collection agency is acting on your behalf. Factoring is especially useful for generating cash when it is required immediately and if you are willing to pay a commission.

The Factoring agency will buy all or some of your outstanding invoices and advance you a percentage of their value. The amount the Factor will advance you against an invoice will depend on the calibre of the debtor. The Factor then administers the account, taking responsibility for the debt, sending out account statements to the customer, and following up unresolved debts.

Different types of Factoring are available, depending on your needs. For example, full service may involve the factor taking on all your debts; a less complete service may stipulate that the customer pays you, and not the Factor - or that the Factor does not take over your records.

If you choose to use Factoring it will also free up your business resources from the time-consuming and costly administration of customer account management.

First Trust Bank offers a wide range of finance solutions which can be tailored to meet your individual requirements. Further information on our business services please refer to the Related Information section.


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