Entrepreneurship, Second Edition

11.9. Choosing the Right Mix of Short-Term Financing

The entrepreneur attempts to secure the required short-term funds at the lowest cost. The lowest cost usually results from some combination of trade credit, unsecured and secured bank loans, accounts receivable financing, and inventory financing. Though it is virtually impossible to evaluate every possible combination of short-term financing, entrepreneurs can use their experience and subjective opinion to put together a short-term financing package that will have a reasonable cost. At the same time, the entrepreneur must be aware of future requirements and the impact that using certain sources today may have on the availability of short-term funds in the future. In selecting the best financing package, the entrepreneur should consider the following factors:

The firm's current situation and requirements

The current and future costs of the alternatives

The firm's future situation and requirements

For small firms, the options may be somewhat limited, and the total short-term financing package may be less important. On the other hand, larger firms may face myriad possibilities. Clearly, the short-term borrowing decision can become quite ...