Short-Term Funding. An Effective Device to Aid Business Profitability


Term Paper, 2013

15 Pages, Grade: A


Excerpt

Table of Contents

INTRODUCTION

DEFINITION OF KEY TERMS

TYPE OF SHORT TERM FUNDING
A. Owner’s Capital
B. ESUSU
C. Business Overdraft
D. Loans From Family, Friends and associates
E. Trade Creditor
F. Debt Factoring And Invoice Discounting.

GUIDE TO USING SHORTERM FUNDING
Make a clear vision and mission statement
Evaluate the options
Payback Period of the Investment
Processing duration
Inflation
Interest Rate

CONCLUSIONS

INTRODUCTION

The key purpose of any business venture is return. This can come in various forms such as profit maximization; maximization of contribution, shareholders wealth maximisation among others. These strategic objectives usually come in sizes depending on the nature of the business or organisation.

Lofty as strategic decisions may be, the importance of having adequate and efficient funding to support it cannot be over-emphasised. It has been shown again and again that one of the main reasons why business fails is the miss-matched of funding. Experience has shown that when you use your working capital (a form of short-term fund) to finance a capital project, the ability to run the business as a going –concern into a foreseeable future becomes shaky due to cash-flow problems.

Funding a business that requires a short-term funding with a long-term financing is a sure way to exist the market arena in an unceremoniously. It is therefore critical to have a right mix of fiancé to boost productivity and enhance competitive advantage.

The purpose of this write up is the discussion of how short-term funding can be used to aid business profitability. In order to achieve this objective, various sources of short term funding will be evaluated with a view to underscore the relative advantages and disadvantages. I will also recommend factors to consider before using short term funding.

Figure 1 : FLOW OF FUNDS FROM SAVERS TO BORROWERS

Abbildung in dieser Leseprobe nicht enthalten

DEFINITION OF KEY TERMS

1. Short –term: - This is usually defined as a period within one year. Some writers have also suggested a period within 6 months
2. Long term: - This is a period beyond one year. This could be further broken down to medium term i.e within 5 years. In view of the fast that the longer you look into the future, the more uncertain it becomes, I would define long term as a period between 5 to 10 years.
3. Profit: - This is the bottom line after all expenses have been deducted. Profit is revenue minus expenses (i.e π = R – E)
4. Cash: - This is the money accessible now. These may include; cash at hand, cash at bank, easily convertible financial instrument ( i.e fixed deposit).
5. Financing: - This is the use of both short and long term financial instruments to fund a project. For instance, the process of funding my building project which is located in my village – Egbe is a classic example.
6. Risk: - This is the variability in the expected returns. It is the likely hood of project falling short of expectation. Risk to this writer will be incomplete if it is viewed from just the negative point of view. I therefore add by saying, risk is equally both the positive and negative expectations from a project outcome.
7. Return: - This is what is accruable to a risk taker. It is the benefit of being an entrepreneur. The reward for taking on risk is the potential for a greater investment return.
8. Capital: - This can be any form of wealth employed for the purpose of transformation and multiplication.
9. Commercial Paper: - Short term promissory notes (IOU) issued by company at discount to face value and redeemed at face value.1

TYPE OF SHORT TERM FUNDING

A. Owner’s Capital

This is the commonest and first point of call for any entrepreneur and start up businesses. It is the capital from personal savings accessible to the owner for investment need. Usually, outside investors would expect the owner to have trust in his/her venture first before attracting their funds.

In most cases, new businesses will find it almost impossible to find prospective investors unless they have committed some form of personal investment. This will also be applicable to those who would like to borrow from financial institutions to finance their new business. For example, if a start-up entrepreneur is not prepared to make their own initial seed of capital contribution then why should anyone else risk their capital? Starting your business with your own money first is a pathway to attract investors and demonstrate that you are willing to commit fully to the new business.

ADVANTAGES

1. Accessibility/Convenience: - It is easily accessible without hassle. This is because it is the owner‘s contribution which may not require anybody’s permission.

2. Interest: - It is usually interest free. The withdrawal from business funds associated with interest payment is not applicable here as the owner of the business will not like pay himself/herself interest.

3. Rollover of Capital: - With this type of finance, invested fund can be easily rolled over in perpetuity for the purpose of expansion and growth of the business. The implication is that there is no repayment hassle.

DISADVANTAGES

1. Capital: - This is perhaps the biggest challenge confronting this type of funding. The amount of money or capital raises is very small and limited. Experience has shown that in most times, owner’s capital is like a drop in an ocean in the life cycle of a business.
2. Risk: - In case of business failure which is inevitable in investment decisions, the owner bears all the risk of failure including his life savings
3. Motivation: - Sometimes the motivation to achieve result maybe low since it is the owner’s capital that is at stake here. The drive and passion for excellent goal accomplishment may be low since accountability is to self. This is common with the sole proprietorship (owner managed business).

B. ESUSU

This is a form of funding common within the local community. It is a form of cooperative that provides platform for members to borrow at a concessional rate. Members are expected to have made contributions into the pool which maybe daily, weekly or monthly depending on individuals streams of income. Members can borrow more than their contribution at any point in time.

ADVANTAGES

1. Collateral: - Usually, there is no additional security expected from the lender as money is giving out on membership trust.
2. Convenience: - It is very convenient for a start up business.

DISADVANTAGES

1. Risk: - This type of funding is more risky to the lender than the borrower. Conventional wisdom has shown that borrower often default and even abscond with the money.
2. Capital: - Fund that is raised here is minimal and may not be sustainable

C. Business Overdraft

Overdrafts are recommended as source of short-term financing option. They are a good financing means especially when it comes to working capital management. This type of funding is usually available to bank’s customers who have had a business experience with the bank for a period of time.

Banks would normally expect to see a functioning account i.e an active account without which a bank overdraft will not be granted. It can be arranged to meet business exigency.

[...]


1: http://en.wikipedia.org/wiki/Money_market

Excerpt out of 15 pages

Details

Title
Short-Term Funding. An Effective Device to Aid Business Profitability
College
( Atlantic International University )  (Business and Economics)
Course
Accounting and finance
Grade
A
Author
Year
2013
Pages
15
Catalog Number
V301384
ISBN (eBook)
9783656973737
ISBN (Book)
9783656973744
File size
482 KB
Language
English
Keywords
short-term, funding, effective, device, business, profitability
Quote paper
Michael Oluwadare Idowu (Author), 2013, Short-Term Funding. An Effective Device to Aid Business Profitability, Munich, GRIN Verlag, https://www.grin.com/document/301384

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