1.

What are the possible recommendations to address the problems related to

short-term financing?

According to Chris Potter(2017)

Pros of Short Term Loans

Significant benefits of short-term loans include rapid distribution of

funds, extensive geographic availability and the need for minimal

collateral or background checks. When it comes to payday, pawn shop

or title loans, a valid checking account, proof of employment, personal

possessions or a car title means most consumers can receive cash in

hand or direct deposited into their checking account on the same day

they apply for a loan. This is virtually unheard of outside a credit card

cash advance or borrowing money from a friend or family member.

More traditional types of loans can take weeks to conduct a thorough

evaluation and finally receive approval. Short term personal loans are

specifically tailored towards individuals who have bad or

questionable credit and may never qualify for a loan from institutions

like the bank or credit union.

Cons of Short Term Loans

The minimal requirements and easy accessibility to short-term funds

can come with significant drawbacks and repercussions. Since short-

term loans are often considered a financial resource of last resort,

organizations which issue these types of loans tend to charge

excessive fees, have rigid terms and onerous interest rates. There is no

such thing as a free lunch and if you want $500 in cash within a few

hours of applying it's going to come with strings attached. Short-term

loans can be for any length of time but on average they last about two

weeks. The interest rate for a secured short-term loan may be as high

as 15% which on an annualized basis can be thousands of percent. If a

borrower should default, they run the risk of losing any underlying

collateral like a car or any personal possessions used at a pawn shop.

Choose Your Loan Wisely

If the necessary funds can be obtained by any other means than a

short-term loan then they should be considered first. There are

numerous other and better ways to get cash such as borrowing from a

relative or friend, asking for a cash advance from work, starting a

part-time second job and having multiple garage sales. If you have to

get a short-term loan, be sure to ask an inordinate number of

questions, especially about contract terms you may not understand,

and receive copies of all loan documentation. The reason why short-

term loans have such bad reputations is because many consumers

become unable to repay the loan on the agreed upon date and for the

payoff amount. This leads to additional short-term loans making

matters worse. Protect yourself and your finances by only getting a

short-term loan if it is absolutely necessary and paying it back in full

on or before the agreed to date.

According to Meredith Wood(2016)

Like all small business owners, you face important decisions every

day. Should you take on that new client? Add that product to your

portfolio? Hire that new employee? The list goes on.

For entrepreneurs in need of quick access to capital, one of the biggest

questions will likely be whether to take on short-term debt. Short-

term financing can help fund equipment, supplies, and labor. It can

also help small business owners take advantage of new opportunities

or help seasonal businesses purchase inventory to prepare for highest

volume months.

Short-term debt can be a tricky issue. Overextending can mean paying

a high cost to borrow funds—but without taking the risk, you could

be sacrificing important opportunities to grow your business. There

are some key decision criteria to examine when considering new

financing options.

Pros and cons of short-term financing

Pro: Relaxed eligibility

Short-term lenders typically have more relaxed eligibility

requirements than conventional banks or SBA loans do. This lets

borrowers with damaged credit access much-needed sources of

capital. For businesses shut out of the conventional lending market,

short-term debt is often a lifeline.

Con: Higher interest rates

A short-term loan is almost always at a higher interest rate than a

long-term loan—and often multiple times higher. Be sure to watch out

for high interest rates.

Pro: Get approval in just hours or days

Businesses with immediate capital needs can usually secure short-

term loans in a matter of hours or days. This stands in stark contrast to

many conventional lenders, who often take weeks or months to close

a deal.

Con: The high-cycle risk

You take out a short-term loan because you need the money. If cash

flow is really tight, you run the risk of not being able to make the

payments on that loan—which can mean needing another loan to

make the original payment. You don’t want to get caught in a

common and painful debt trap.

Pro: Quick payment plans no longer than 18 months

Short-term loans are, by definition, of limited duration—typically

somewhere between three and 18 months. This means your short-term

debt quickly gets cleared off your books, which is always comforting.

Con: Could be habit-forming

The easy availability and convenience of short-term loans often gets

borrowers hooked towards opting for them whenever they need some
money. While this is definitely convenient, you may actually wind up

spending more than you can afford (or wasting money, if you could

qualify for a lower-cost term loan elsewhere).

Pro: Less paperwork

Documentation requirements are much looser—often just a few

months’ worth of bank statements. Busy entrepreneurs (or anyone

who’s been through the arduous process of securing traditional bank

financing) will appreciate this difference. By securing capital through

a streamlined process that requires minimal paperwork, business

owners can focus on day-to-day operations, instead of getting bogged

down in financing details.

When short-term debt makes sense

Roughly 50% of businesses don’t make it past five years, so the

acceptance of new risk is a serious question that each business owners

must answer for themselves—relying on what they know about their

tolerance for risk and their need to invest.

Loans, and especially short-term debt, can help small businesses get

out of a cash- flow jam. Short-term debt is a resource that can make

sense for businesses that generate daily revenue, assets that can bring

in revenue quickly, or companies requiring capital for a revenue-

creating opportunity such as a large pending order, a seasonal sales

push, or essential equipment or inventory for a startup.

If you are in a position where failing to secure new capital will cost

your company guaranteed revenue, a short-term loan is almost

always a good choice. The money can be paid back quickly, with little-

to-no risk.

Don’t rob Peter to pay Paul

On the other hand, taking out a short-term loan to meet long-term

debt obligations (the old “robbing Peter to pay Paul” scenario) is less

defensible. In general, short-term loans are best suited for situations

where they can be directly tied to revenue.

Small businesses like yours are the lifeblood of the US economy,

representing 99% of US companies, 54% of total sales and 55% of all

jobs in the US, according to theUS Small Business Administration.

Having access to capital, and making the best decisions possible, is

crucial to small businesses’ continued success.

Acoording to International Finance Corporation, Risk in Short-Term

Finance

Short-term finance involves providing loans with a term of a few

months or less, but no longer than a year.

Short-term finance, such as trade finance, often involves collateral

such as accounts payable or inventories. A company will pledge or

sell its receivables to the creditor in exchange for immediate cash (also

called factoring). While certain corporate loans and types of project

finance usually target a specific purpose such as construction or

purchase of equipment, short-term loans such as working capital

loans, are usually for general purposes and support the general

business operations of a company.

The environmental and social issues related to a short-term finance

transaction range from minimal to complex and vary according to

size,industry sector, location, and company commitment to managing

environmental and social risks. Because a working capital loan

provides general support to a company as opposed to being targeted

for equipment purchase or expansion, the financial institution is

exposed to the borrower’s overall risk including potential

environmental and social issues.

Reputational risk is the main concern for short-term finance,

especially if borrowers have pending environmental and social issues

that are highly visible and scrutinized by the public. Due to the short-

term nature of the transaction and the use of collateral, the credit risk

to a financial institution is limited. However, given that assets are

used as collateral there may be liability risks, for example in the case

of land contamination. Due to the short tenure of short-term finance, a

financial institution will have limited leverage in managing

environmental and social risks.

Corporate Guardian (2017), Short term finance for those who need

cash flow can be an invaluable tool to get your business through a

tight period until additional resources become available. While the

benefits often outweigh the limitations associated with short-term

loans, it is always important to completely understand what you

become liable for to avoid further damaging your situation.

Pros:

 Quick funds when you are in need. The biggest advantage of a

short term loan is that, upon approval, you will often receive funds

within a week. If for example, you need to make a quick payment

to outstanding bills, or you need to purchase new stock quickly – a

short term loan will help you meet your cash requirements

immediately.

 Available even to those with bad credit. The banks will review your

credit report before supplying you with a loan, and if your credit
 report is not up to their standard, your loan request will be denied,

as they will deem you too high a risk. Short-term lenders are

lenient on your credit report and will assess your loan by analyzing

other avenues such as asset values.

 The flexibility of repayments. Corporate Guardian can help you

source a short-term loan with a range of options for repayments,

i.e. if you prefer a 3 month loan or a 6 month loan and so on.

Cons:

 Higher interest rates. The biggest limitation of these loans is that

there is generally a higher interest rate associated with short-term

loans as opposed to long-term loans. However, it is acknowledged

in most circumstances that a short-term loan is only an interim

measure to refinance some to a more traditional long-term loan.

Short-term financing is commonly associated to a higher interest rate in contrast to long-term loans

which marks its main limitation. Nevertheless, it is already generally recognized in most situations that a

short-term loan is just temporarily used to refinance the usual long-term loan.


Make the right decision for your business

If the necessary funds can be obtained by any other means than a

short-term loan, then always consider those options first. If you are in

urgent need of a loan, be sure to ask an inordinate number of

questions about the contract terms, and any other terms you may not

understand. Further, always make sure you receive all copies of any

loan documentation.