Short-Term Financing Sources : Short-term financing is one with a maturity period of less than one year. It is normally associated with the productive activity or operating cycle of the company and is constituted both by commercial or supplier financing (also called free financing or spontaneous financing) and traditional financing through financial institutions, either through short-term loans. or by means of another series of mercantile operations such as the commercial discount.

Suppliers And Trade Creditors

Financing from suppliers and other commercial creditors has its origin in the entity’s commercial operations and is usually also called “spontaneous financing”. As soon as we obtain a term for the payment of our debts, we are getting the suppliers to finance us during that period of time. It is not in itself a financial negotiation (hence the nickname spontaneous), but this term will be established in the process of the sale itself. 

This financing has the advantage that it is free of cost and the payment period available will be greater than the volume managed and the dependence on the customer’s supplier, as well as the usual practices of each economic sector.

This financing can be difficult for the provider to obtain at first because the provider’s history of previous agreements guarantees that it will charge in the future. In this case, the provider bears all the risks: the risk of non-payment by the client, the reduction in its level of liquidity, and the loss of profitability due to the goods that it cannot use in the hands of its client. 

On the other hand, we must take into account (let’s think now from our own position as providers) that this reduction in liquidity can force the provider to need funds and perhaps to have to finance himself against a third party. In this case, the loss will go beyond profitability, as it will incur real costs.

Given these risks and difficulties, in many cases it may be more beneficial for you to offer the customer a discount for early payment, reducing your income, but also ensuring liquidity and risk elimination. Of course, provided that the discount percentage offered is less than the cost of financing, for example, through a line of credit.

Short-Term Credit Operations

In short-term financing credit operations also called credit policies or lines of credit, the financial institution makes available to the client a maximum amount of indebtedness that he will dispose of according to his needs. 

The credit account, line of credit, or credit policy works like a current account: the client can withdraw, but can also enter; in fact, the balance may occasionally be in his favor. The client will only have to pay interest for the amount of money used (not for the amount made available to them), and in the event that this current account has a balance in their favor, they will also receive interest (at a lower interest rate than the one they must pay for use of funds). 

It is a very common resource for the daily management of the treasury in companies in general since it allows simpler management of cash flows. As their purpose is to cover operating or working capital needs, they are also called working capital policies or lines. Previously we need to know how our needs for funds are calculated.

Calculation Of Short-Term Financing Needs

In this section, we are going to focus on the calculation of the financing necessary for the management of the company’s current activity, and the day-to-day business activity that is represented in the balance sheet as current or current assets and liabilities. This is often referred to as the Operating Need for Funds (NOF). The management usually corresponds to those responsible for the treasury and they need daily supervision and decision-making.

To Calculate The NOF We Must Carry Out The Following Process:

• We must calculate the days it takes to collect from our customers who we let them buy on credit. With almost total certainty we will have to stick to the practices in the sector, so we probably have little room for maneuver.
• We must calculate the days it takes to pay our suppliers. We will be in a similar situation, we will not be able to achieve more terms than usual in the sector.
• We must have goods in inventory. Maintaining these assets is expensive, not only because they have to be financed, but also because they add management costs, insurance, risks of breakage, obsolescence… 

If it is financed with short resources, the first option is the suppliers. The rest can come from credit operations and trade discounts. However, short-term financing is risky because the returns of the funds have very short terms.