Businesses need to consider how they will fund their activities when starting up as well as during their day-to-day operations. Various costs need to be covered, such as equipment, stock and paying bills.
Short-term finance is used to help a business maintain a positive cash flow. For example, it can be used to:
Overdrafts are one of the most common forms of finance. However, they should be used carefully and only in emergencies as they can become expensive due to the high interest rates charged by banks.
Common features of a bank overdraft include:
Trade credit must be agreed with a supplier and forms a credit agreement with them. This source of finance allows a business to obtain raw materials and stock but pay for them at a later date. The payment is usually made once the business has had an opportunity to convert the raw materials and stock into products, sell them to its own customers, and receive payment.
Common terms and conditions of a credit agreement include: