- The first step in short-term financial planning is to forecast future cash flows. The cash flow forecasts allow a company to determine whether it has a cash flow surplus or deficit, and whether the surplus or deficit is short-term or long-term.
- Firms need short-term financing to deal with seasonal working capital requirements, negative cash flow shocks, or positive cash flow shocks.
- The matching principle specifies that short-term needs for funds should be financed with short-term sources of funds, and long-term needs with long-term sources of funds.
- Bank loans are a primary source of short-term financing, especially for small firms.
- The most straightforward type of bank loan is a single, end-of-period payment loan.
- Bank lines of credit allow a firm to borrow any amount up to a stated maximum. The line of credit may be uncommitted, which is a nonbinding informal agreement, or may more typically be committed.
- A Bridge loan is a short-term bank loan that is used to bridge the gap until the firm can arrange for long-term financing.
- The number of compounding periods and other loan stipulations, such as commitment fees, loan origination fees, and compensating balance requirements, affect the effective annual rate of a bank loan.
- Commercial paper is a method of short-term financing that is usually available only to large, well-known firms. It is a low-cost alternative to a short-term bank loan for those firms with access to the commercial paper market.
- Short-term loans may also be structured as secured loans. The accounts receivable and inventory of a firm typically serve as collateral in short-term secured financing arrangements.
- Accounts receivable may be either pledged as security for a loan or factored. In a factoring arrangement, the accounts receivable are sold to the lender (or factor), and the firm’s customers are usually instructed to make payments directly to the factor.
- Inventory can be used as collateral for a loan in several ways: a floating lien (also called a general or blanket lien), a trust receipts loan (or floor planning), or a warehouse arrangement. These arrangements vary in the extent to which specific items of inventory are identified as collateral; consequently, they vary in the amount of risk the lender faces.