Importance of Short Terms of Finance

Small businesses depend on short-term finance to continue operations through economic downturns. Without short-term financing, new businesses might never be launched, or growth and expansion might be compromised. Businesses might rely on access to short-term capital in order to obtain equipment, although in certain similar instances long-term financing might apply instead. Short-term loans also facilitate international trade and support commerce between nations.

Short-term financing is a form of debt finance that is appropriate for businesses needing access to capital and is often appropriate for businesses that are cyclical in nature. According to the Bankrate website, the repayment terms typically require that loans be settled within 12 months or less. Short-term financing can be obtained through a letter of credit for trade finance, a line of credit that may be drawn upon and credit cards.

Businesses can turn to short-term financing to rent or lease equipment that they need to operate a business thanks to the inherent flexible nature of short-term finance. Traditionally, equipment costs are lofty and may be best suited for long-term finance, which unfolds over a period of many years. In the event that a financial institution is not willing to take on the risk associated with financing equipment needs over the long term, however, short-term credit is often flexible enough to finance equipment needs.

Short-term financing does not require a drawn-out and costly process that could interfere with a borrower's needs. This is helpful if a business requires quick access to capital for an unforeseen event, because short-term financing leads to quick access to capital. Given that the terms of this type of financing require a debt to be repaid promptly, however, the nature of short-term loans increases the chance for borrower default, according to the World Academy website.

Trade finance, which involves financing for import and export activity between nations, is a type of short-term finance. It allows importing entities to obtain letters of credit from financial institutions to receive imports without any upfront payments, but borrowers often repay the funds within a matter of months.