Question

3. You are the owner of a small landscaping company. Usually, business is always good in the spring and summer, leaving enough resources to ride out the slow winter. But the revenue from last summer was unusually slow due to a severe drought, leading to less business than usual in the fall, and causing a cash shortage this winter. You need a short-term injection of cash so that you can maintain equipment, pay employees, and keep your company going for a few months until spring arrives. Which of the options for short-term financing discussed in the text would you choose and why?

trade credit, factoring, short term bank loans, commercial paper, direct investments from owners

Answer 1

Short term bank loans:

• It's clearly a case of short term cash flows mismatch, hence i will go for short term bank loan in the form of cash credit or a line of credit, a revolving credit agreement
• Unsecured
• Easy to obtain, less cumbersome, less time consuming
• Cheaper than trade credit, factoring
• Less process oriented than issuance of commercial paper
• Doesn't put pressure on the owners' pocket