Duron III-BSA Subject/Time/ Room: Fin 22A/8:30-9:30E/BE 312 Professor: Kathleen H. Absin
Topic: Uses of security in short-term financing
Meaning of Security
A security is a financial instrument that represents an ownership position in
a publicly-traded corporation (stock), a creditor relationship with governmental body or a corporation (bond), or rights to ownership as represented by an option.
Meaning and nature of short-term financing:
Short Term financing is that from of financing which embraces borrowing or
lending of funds for a short period of time. It refers to the finance obtained on short term basis, usually one year or less in duration. Short term finance is secured for financing the current assets, for example, inventories. Short term finance is also known as working capital which is the excess of current assets over current liabilities. Current liabilities become due within one year and indicate the amount of short-term credit being utilized by the business.
Interest Rates on Short-Term Loans
In a normal economy, interest rates on short-term loans are higher than
interest rates on long-term loans. In a recessionary economy, however, interest rates may be low and short-term loan rates may be lower than long-term loan rates. Short- term loan rates are usually based on the prime interest rate plus some premium. The bank or other lender determines the premium by determining what risk your company is to them. They do this by looking at the documentation you provide them in order to qualify for a short-term loan.
Short-term Loans and Start-up Businesses
It is possible for a start-up company to secure a short-term loan. This is
because short-term loans are less risky than long-term financing simply due to the fact of their maturity. Start-up firms have to present extensive documentation to the lender, such as projectedcash flow statements for the next 3-5 years along with projected financial statements for the same time period. They have to explain where their revenue will be coming from and how it is expected to be paid. Most start-up companies will only qualify for secured loans from a lender. In other words, the start-up firm would have to offer some sort of collateral to secure the loan with the lender.
Short-term Loans and Small Business
The availability of short-term loans to small businesses is absolutely essential
in order for our economy to operate smoothly. Without short-term financing, small businesses literally cannot operate. They can't buy their inventory, cover working capital shortages, expand their customer base or operations, or grow. When commercial banks tightened up their lending policies during the Great Recession and afterward, small businesses and the economy suffered because of these very issues.