Advantages And Disadvantages To A Company In Using Short-Term Financing
Discussion: Pros and Cons of Short-Term Financing
Short-term financing has become a common strategy that companies have used recently, depending on their financial situations (Hecht, 2018). Whenever companies face challenging times, they ought to find significant ways to help them finance their operations without creating losses or affecting the business. Therefore, short-term financing has illustrated positive and negative impacts on companies seeking that specific strategy. Consequently, it is significant to determine when short-term financing is substantial to a company and when companies face a disadvantage due to short-term financing.
The main advantage of short-term financing is the time limit that a short-term loan can take compared to long-term financing. Most short-term financing loans are applied digitally; hence there is no need to spend time meeting with the lender of the money in person (Hecht, 2018). More so, there is not much paperwork to fill, making it easier to access the loan compared to long-term financing. Also, the time limit to pay the leased finances is short, meaning that the interest rates accrued are not much. Therefore, companies that need last-minute funding due to negligent accounts benefit from short-term financing to help them get the financing faster.
On the other hand, despite the pros of short-term financing, the financing also disadvantages companies in many ways. Companies face challenges because of the interest rate accrued during the payment date. Many short-term financings do not charge interest rates; they charge a factor rate (Hecht, 2018). Long-term funding offers interest rates, making it easier for the company to pay gradually. In contrast, factor rates are fixed prices that the lender expects to be paid after the duration of the long. In conclusion, short-term financing is essential for the short-term goals of a company compared to long-term funding.
