A company that needs money has a choice of three types of funding: capital raised through selling ownership shares (stock), long term borrowings and short term finance. Selling shares and borrowing long term are appropriate for starting a company or financing expansions and new facilities; but once a company is in operation, it will most likely need short term sources of money to fund inventory, payroll and unexpected expenses. It is never a good idea to borrow long term to fund short term obligations, so it is advisable for your company management to cultivate sources of short term money.
It is always wise for the management of a company to develop a good working relationship with the local banker because banks are excellent sources of short term funding. Banks offer revolving credit lines that can be drawn down and repaid numerous times without re-applying for credit, and they are generally less expensive than credit cards. Banks also provide payroll services and can finance payroll when your company's cash is low. Small business banks depend on local companies, so they focus on giving personal attention and assistance to their customers. It is much easier to call up your banker with a request for quick money to cover an emergency if you have already devoted the time and effort to establishing your company's creditworthiness and reliability through developing a strong working relationship with that banker.
Receivables factoring and invoice discounting are two ways finance companies provide short term financing. When they factor your receivables, they buy your invoices at a fairly steep discount and conduct any collection activities needed. This is an expensive manner of obtaining funding because the finance company is taking on the risk of collection, and many companies factor only their slow paying invoices. Invoice discounting involves using your invoices as collateral for short term borrowing. Your company maintains ownership of the invoice assets and must replace any pledged invoices that are paying slowly, but this financing method preserves the balance sheet asset value and is less expensive than factoring because the finance company doesn't assume the same degree of risk. A good relationship with a finance company is beneficial when it comes time to lease equipment or vehicles; but since your company does not maintain any deposit accounts with a finance company, maintaining a good payment record is vital.
The best way to finance inventories is through trade credit, which is the number of days your vendor will allow before payment is due on your invoices. For a new customer, most vendors will require cash-on-delivery. As trust develops, the vendor will allow 30, 60 or 90 days to pay invoices, which may be enough time for your company to sell the inventory and collect payment. Trade credit normally does not cost anything because the vendors offer it to their best customers as an inducement to continue doing business.
The better and more dependable your short term sources of financing, the more competitive your company will be in your industry. Short term financing allows you to take advantage of sudden opportunities to make additional revenues or capture business ahead of your competition. Good short term funding sources give a company flexibility and versatility.