Question

Suppose that you are a business owner and you need immediate funds to meet short-term operating expenses. From what sources could you gain the capital you need, and what are some of the characteristics of those sources? Further, discuss your preference, and why.

Answer 1

Some of the major sources to meet the immediate requirements of short-term Capital funds to meet day to day operating expenses can be summed up as follows-

1.Short-term corporate bonds- The bonds are as an instrument of financing or debt to the issuer with fixed interest rates attached to it. With a corporate bond, the lender would receive no ownership in the company. The money is repaid back on reaching the maturity date.

2. Bank borrowings- An operating working loan is taken from the bank at a nominal interest rate to keep the operations of the entity.

3. Trade credit- Credit purchases done during the course of business also save a lot of money. The entities who are in a regular trade relationship usually develop trust and bond to do trade on credit. This exercise usually buys a few months for actual cash payment.

My prefrence would be to issue short term corporate bonds as it will not dilute my stake in the company plus there is no risk to repay the amount immediately. The financial statements are not adversely affected or are put in questions. The trade credit has goodwill at stake where as the bank loans have too much procedural compliance. Also, under both the sources there stands a chance to affect the financial statements in a negative manner.