According to the class textbook, there is no universally accepted definition for short-term finance (Ross, Westerfield, Jaffe, & Jordan, 2018); however, short-term finance is easily understood when considering long-term finance and what that implies. Long-term finance involves cash inflows and outflows over multiple years; likewise, short-term finance involves cash inflows and outflows, but usually within just one year. An example of a short-term financial decision is when a business orders raw materials, pays in cash, and anticipates selling finished goods in one year for cash (Ross et al., 2018).

QUESTION

This is a two part questions. First I will need the discussion question answer which will be below in bold, 250+ words APA format. For those response I will need three responses of at least 150 words each.

There are several strategies for short-term financing. Describe two strategies and include the advantages and disadvantages of each strategy.

Part two

Student one:

There are several strategies for short-term financing. Describe two strategies and include the advantages and disadvantages of each strategy.

According to the class textbook, there is no universally accepted definition for short-term finance (Ross, Westerfield, Jaffe, & Jordan, 2018); however, short-term finance is easily understood when considering long-term finance and what that implies. Long-term finance involves cash inflows and outflows over multiple years; likewise, short-term finance involves cash inflows and outflows, but usually within just one year. An example of a short-term financial decision is when a business orders raw materials, pays in cash, and anticipates selling finished goods in one year for cash (Ross et al., 2018).

Strategies for short-term financing include business loans (Ross et al., 2018). New businesses often borrow cash; in addition, businesses with hopes of expanding will often borrow cash. Business loans have traditionally been viable options and there are two types: secured and unsecured. Secured business loans are more difficult to obtain than unsecured business loans due to required collateral; secured business loans require collateral, whereas unsecured business loans do not; property can be seized in event of defaulting on secured business loans, whereas unsecured business loans will carry higher interest rates, making individual loan payments higher and more difficult to afford; unsecured business loan qualification can be more difficult for businesses with poor or nonexistence credit history (McMullen, n.d.).

References
McMullen, A. (n.d.). The advantages and disadvantages of an unsecured business loan. Small Business-Chron. Retrieved from
Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill Education.

Student two:

Two types of short-term financing strategies used by businesses are loans (secured and unsecured) and trade credits. Unsecured loans are issued based on the creditworthiness of a borrower, so they typically hold a higher interest rate since the lender is issuing the loan based on the idea of a promise to pay. Secured loans are issued to the borrower with some type of lien or collateral (such as inventory), meaning if the loan defaults, the lender can use the assets to repay the loan (Majaski, 2020). Generally, unsecured loans are preferred over secured loans. An unsecured loan typically has a higher interest rate than a secured loan; however, since the loan is not backed by collateral, it may be easier for firms to obtain additional lines of credit with less secured debt (Guerard & Schwartz, 2007). However, secured loans may be a good source of funding for new businesses, since they may not have enough creditworthiness to quality for an unsecured loan.

Trade credits allow the firm to purchase goods without making an upfront payment. This would be reflected as an accounts payable transaction for the supplier of the goods. The purchaser and supplier come up with terms, which indicate length of time before payment is due and any applicable discount if payment is received early (Guerard & Schwartz, 2007). The benefits of this are that is can be a cheap source of funding for the firm, since no interest or penalties are paid if payment is received on time. A downside is that trade credits may not be available for all goods and services that a firm may need.

Guerard, J. and Schwartz, E. (2007). Quantitative Corporate Finance. Springer Science + Business Media, LLC.

Majaski, C. (2020 Mar 5). Unsecured vs. Secured Debts: What’s the difference? Retrieved from https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp

Student three:

For short term financing there are many options such as, a line of credit, overdraft protection, invoice financing, and angel investors. The two that I chose for this form to discuss is invoice financing and angel investors.

Invoice financing is when a business uses an outstanding invoice as their collateral. The way this works is a business has an invoice they are awaiting a customer to pay however the business needs the cash now and a lender finances the outstanding invoice. The pros of invoice financing are that the funding is quick, the repayment is either 12 or 24 weeks, the business receives 100% of the invoice amount and customers still pay the invoice to the business so it is discreet. The cons of this are that sometimes there are specific software’s that are needed, businesses need to have a healthy financial track record, and the business is limited to the amount of the invoice.

Angel investors are much different than a loan or financing. This is person that has the cash on hand and the want to invest in a company. The pros to an angel investor are that they bring money to the business, there are no monthly payments, and they offer help, support and guidance. The cons of angel investing are that they require business equity, their vision may be different, and some of the decision making power is taken away.

ANSWER

**Short-Term Financing Strategies: Advantages and Disadvantages**

Short-term financing refers to the financial strategies employed by businesses to meet their immediate cash needs, typically within a one-year period. Two commonly used strategies for short-term financing are business loans (secured and unsecured) and trade credits. Each strategy has its advantages and disadvantages, which are discussed below.

**Business Loans:**

Business loans are a common source of short-term financing, particularly for new businesses or those looking to expand. There are two types of business loans: secured and unsecured.

Secured Business Loans

Advantages:

 Lower Interest Rates: Secured loans offer lower interest rates due to the presence of collateral, which reduces the lender’s risk.

Easier Qualification: Businesses with limited credit history or poor credit can still qualify for secured loans as the collateral provides assurance to the lender.

Higher Loan Amounts: Secured loans allow businesses to borrow larger amounts of money based on the value of the collateral.

Disadvantages

Risk of Collateral Loss: If the business defaults on the loan, the lender can seize the collateral, which could result in a significant loss for the business.

Lengthy Approval Process: Secured loans typically require extensive documentation and appraisal of collateral, leading to a longer approval process.

Limited Flexibility: Once collateral is pledged, it restricts the business’s ability to use the assets for other purposes.

Unsecured Business Loans

Advantages:

No Collateral Required: Unsecured loans do not require collateral, making them more accessible for businesses that lack valuable assets.

Quicker Approval: The absence of collateral simplifies the loan application process, leading to faster approval times.

Flexible Use of Funds: Businesses have the freedom to allocate the loan amount as needed without restrictions.

Disadvantages

Higher Interest Rates: Unsecured loans carry higher interest rates compared to secured loans due to the increased risk for lenders.

Limited Loan Amounts: Since unsecured loans are based on creditworthiness, businesses can typically borrow smaller amounts than with secured loans.

Stricter Qualification Criteria: Lenders closely scrutinize the business’s credit history, financial stability, and cash flow to assess eligibility for unsecured loans.

**Trade Credits:**

Trade credits involve purchasing goods or services from suppliers without immediate payment. Instead, payment is deferred for a specified period, often with the offer of discounts for early payment.

Advantages

Cost-Effective: Trade credits do not involve interest charges, making them a cost-effective way to finance short-term needs.

Supplier Relationship Enhancement: Timely payment of trade credits can strengthen the business’s relationship with suppliers, potentially leading to better terms and future discounts.

 Flexibility: Trade credits offer flexibility in managing cash flow, allowing businesses to use their available funds for other operational needs.

Disadvantages

 Limited Availability: Not all suppliers offer trade credits, limiting the range of goods and services that can be financed in this manner.

Potential Cash Flow Strain: If a business relies too heavily on trade credits, it may face a cash flow strain when multiple payments become due simultaneously.

Potential Loss of Discounts: If the business fails to make timely payments, it may lose out on early payment discounts, negating the benefits of trade credits.

In conclusion, short-term financing strategies like business loans (secured and unsecured) and trade credits provide businesses with options to meet their immediate cash needs. While each strategy offers advantages, such as lower interest rates for secured loans and cost-effectiveness for trade credits, they also come with their own set of disadvantages, such as collateral risks for secured loans and limited availability for trade credits. Careful consideration of these advantages and disadvantages is crucial for businesses in selecting the most suitable short-term financing strategy to support their operations effectively.

References

Guerard, J., & Schwartz, E. (2007). Quantitative Corporate Finance. Springer Science + Business Media, LLC.

Majaski, C. (2020, March 5). Unsecured vs. Secured Debts: What’s the difference? Retrieved from https://www.investopedia.com/ask/answers/110614/what-difference-between-secured-and-unsecured-debts.asp 

Ross, S. A., Westerfield, R. W., Jaffe, J. F., & Jordan, B. D. (2018). Corporate finance: Core principles and applications (5th ed.). New York, NY: McGraw-Hill Education.