CIMA BA1 Syllabus D. The Financial Context Of Business - Short term finance - Notes ^{3 / 9}

The following are short terms forms of finance

- in the exam always remember to think about these when asked about possible ways of raising finance

1. Overdraft

   This is the riskiest type of finance as the bank can call it in at any time.

   The bank has the right to be repaid overdrawn balances on demand, except where the overdraft terms require a period of notice.

   The bank can use the customers’ money in any legally or morally acceptable way that it chooses

2. Short term Loan

   Less risky than an overdraft but it will possibly need replacing and there’s a risk that it would be on worse terms - if the economy changes

   Unlike an overdraft, a bank loan cannot be withdrawn by the bank after the loan has been granted (assuming the loan terms
   have been met) so this is a more secure source of finance.

3. Trade payables

   Often seen as free finance - although you may actually be missing out on early settlement discounts. 

   Be careful also not to annoy your creditors by taking too long to pay

4. Debt Factoring

   The sale of a business' invoices to a third party. 

   The business selling will pay a fee for this service

   The third party is charged with processing the invoices, and the business lending the invoices is able to receive loans based on the expected payments on the invoices.

5. Short -Term Leases

   Some assets (eg vehicles, printers) can be financed by short-term rental agreements which remove the risk of owning the asset (eg technological change, equipment failure) but are expensive.