Short-Term Financing Strategies

In business, there are various strategies used to finance current assets – long-term and short-term debt. Short-term financing is business financing that is usually obtained for a short term of up to one year or less. According to Chandra (2003), short-term finances are to be paid back within one year or less. Further noted, short-term financing is used during seasonal downswings to meet a fluctuating working capital requirement in business. Ideally, as Hawawini and Viallet (2011) note, there are several short-term financing such as matching and conservative strategies or depending on the level of risk a company is willing to take, they can take an aggressive strategy. Consistently, we review the matching and aggressive short-term financing strategies including the advantages and disadvantages of each strategy to get a comprehensive overview of the financing strategies.

Matching Strategy

The matching strategy is a middle-approach that allows short-term debts have smaller cash surpluses. According to Graham, Smart, and Adam (2016) note that one of the advantages of using this strategy is that the borrowing costs are lower and less exposure to refinancing risk with fewer fluctuations on the interest. However, the interest costs are usually higher as compared to the aggressive strategy.

Aggressive Strategy

In aggressive strategy, businesses rely on short-term borrowing to meet the seasonal peaks and finance the long-term growth of current assets. According to Hawawini and Viallet (2011), as compared to other strategies, the strategy is riskier because businesses are expected to bear greater financial costs and refinancing risks. As elaborated further, the financial cost risk comes from various variations in the cost of debt. The refinancing risk also means that there is a higher possibility that firms may be unable to renew their short-term loans. One benefit of choosing the aggressive strategy is that it decreases the interest rate, and on average it is usually lower than the current long-term interest rate. The strategy also helps firms when they have limited access to long-term funds, and it is necessary to rely on short-term financing.

Short-term relates to current asset financing that is repayable within one year or less. In between these two extremes of strategies, businesses must evaluate the most suitable strategy to adopt. In practice, businesses usually adopt the most conservative strategy – the matching strategy, but depending on the level of risk they are willing to take, they may take on the aggressive strategy.

References

Chandra, P. (2003). Finance sense: Finance for non-finance executives. New Delhi: Tata McGraw-Hill.

Graham, J. R., Smart, S. B., Adam, C., & Gunasingham, B. (2016). Introduction to Corporate Finance: Asia-Pacific Edition with Student Resource Access 12 Months. Sydney: Cengage Learning Australia Pty Limited.

Hawawini, G. A., & Viallet, C. (2011). Finance for Executives: Managing for value creation. Mason, Ohio: South-Western/Thomson Learning.