Short term paper

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Ohio Christian University *

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5060

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Finance

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Feb 20, 2024

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Short-Term Financing Paper Ashlee Frazier FIN5060

Short-term financing is the funds that an organization uses to meet short-term needs. Short-term financing is completed with a relatively brief repayment period. Usually, they are repaid between three months and a year (Block, S.B., Hirt, G.A., & Danielson, B.R., 2017). This can be done through things such as trade credit, accounts receivable, inventory financing, or bank loans (Block, S.B., Hirt, G.A., & Danielson, B.R., 2017) (Srivastav, A.K., n.d). Short-term financing is a tool that can be used by companies when they have short-term needs, but it is a tool that needs to be used correctly. Pros and Cons Short-term financing offers the ability to get finances quickly for unforeseen costs that may arise within a company. One major advantage of short-term financing is that it gives quick access to funds that are needed by the company. Short-term financing also creates flexibility for the company to deal with changing circumstances (Block, S.B., Hirt, G.A., & Danielson, B.R., 2017). While short-term loans have higher interest rates, the total cost of interest is less because of how quickly the loan is paid back (wall street mojo). Short-term financing offers the ability to get finances quickly for unforeseen costs that may arise within a company. Disadvantages to short-term financing are higher interest rates, cash flow strain, and risk of refinancing. Because of the quick access and easier accessibility, short-term financing tends to have higher interest rates than a long-term option. The interest cost is only lower because of the quick repayment period (Block, S.B., Hirt, G.A., & Danielson, B.R., 2017). The quick repayment schedule can also cause a strain in the cash flow. If a company is unable to make the high payment schedule, they may opt to refinance their loan, which can become a very costly habit.

Non-profit versus for-profit organizations The biggest difference between nonprofit and for-profit organizations’ short-term finances is that nonprofits rely more heavily on grants and donations as sources for short-term financing. One major advantage of this type of financing is that there is no repayment. For-profit organizations most commonly use sources such as loans or lines of credit, which have higher interest rates and shorter repayment periods. Non-profits also have the ability to take out short- term loans and may opt to do this because of how quickly they would receive the funds (Treece, K., 2023) Biblical perspective In scripture, there are constant warnings about taking on irresponsible debt. Proverbs 22:26-27 being one which states “Do not be one who shakes hands in pledge or puts up security for debts; if you lack the means to pay, your very bed will be snatched from underneath you” (NIV). This scripture shows us what happens when you take on a debt that you cannot afford. However, this does not mean that all borrowing is wrong. It means that when you are operating with a Kingdom mindset, you need to be wise about your debt. This means only going into debt for things you need and making sure you only take out an amount that you know you can pay back. Debt does not need to be avoided, but as a Christian, we need to be responsible with our debt. For short-term financing, this means that when we take out a short loan, we need to do it with a sound reason and reasonable proof that we can pay it back. For Christian organizations, this should look similar. When using short-term financing, it needs to be done with discernment and wisdom. Christian organizations and people should be cautious when they are taking out loans and should make sure to consistently practice good stewardship with their funds. One way to practice good stewardship is to make sure you are paying your loan payments on time

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(Winger, M., 2018). Christian organizations should use short-term loans when it is necessary to help with temporary financial needs. Conclusion Short-term financing is a useful resource that can help when a business is in need of financial aid for a shortened period of time. When any business, non-profit or for-profit, uses short-term financing, they need to use it wisely, so they do not cause a greater debt. From a Biblical worldview, it is important to remember that when you are borrowing, you still need to practice good stewardship and remember to use discernment and wisdom in every financial decision.

References Block, S. B., Hirt, G. A., & Danielson, B. R. (2017). Foundations of Financial Management (16th ed.). New York, NY: McGraw-Hill. ISBN-13: 978-1259277160 Srivastav, A. K. S. (n.d.). Short term financing - wallstreetmojo . Wall Street Mojo. https://www.wallstreetmojo.com/short-term-financing/ Treece, K. (2023, November 3). Nonprofit financing options: 8 ways to secure funds . Forbes. https://www.forbes.com/advisor/business-loans/nonprofit-small-business-loans/ Winger, M. (2018, January 30). What the Bible teaches about borrowing: Romans 13:8-10 . YouTube. https://www.youtube.com/watch?v=_ymj13xn-kg&feature=youtu.be