Name: Carmela Mae C.

Duron III-BSA
Subject/Time/ Room: Fin 22A/8:30-9:30E/BE 312
Professor: Kathleen H. Absin

Topic: Uses of security in short-term financing

Meaning of Security

A security is a financial instrument that represents an ownership position in

a publicly-traded corporation (stock), a creditor relationship with governmental body
or a corporation (bond), or rights to ownership as represented by an option.

Meaning and nature of short-term financing:

Short Term financing is that from of financing which embraces borrowing or

lending of funds for a short period of time. It refers to the finance obtained on short
term basis, usually one year or less in duration. Short term finance is secured for
financing the current assets, for example, inventories. Short term finance is also
known as working capital which is the excess of current assets over current
liabilities. Current liabilities become due within one year and indicate the amount of
short-term credit being utilized by the business.

Interest Rates on Short-Term Loans

In a normal economy, interest rates on short-term loans are higher than

interest rates on long-term loans. In a recessionary economy, however, interest rates
may be low and short-term loan rates may be lower than long-term loan rates. Short-
term loan rates are usually based on the prime interest rate plus some premium. The
bank or other lender determines the premium by determining what risk your
company is to them. They do this by looking at the documentation you provide them
in order to qualify for a short-term loan.

Short-term Loans and Start-up Businesses

It is possible for a start-up company to secure a short-term loan. This is

because short-term loans are less risky than long-term financing simply due to the
fact of their maturity. Start-up firms have to present extensive documentation to the
lender, such as projectedcash flow statements for the next 3-5 years along with
projected financial statements for the same time period. They have to explain where
their revenue will be coming from and how it is expected to be paid.
Most start-up companies will only qualify for secured loans from a lender. In other
words, the start-up firm would have to offer some sort of collateral to secure the loan
with the lender.

Short-term Loans and Small Business

The availability of short-term loans to small businesses is absolutely essential

in order for our economy to operate smoothly. Without short-term financing, small
businesses literally cannot operate. They can't buy their inventory, cover working
capital shortages, expand their customer base or operations, or grow.
When commercial banks tightened up their lending policies during the Great
Recession and afterward, small businesses and the economy suffered because of
these very issues.