Lesson 7 of 7 · 11 min
Short-term funding strategy
A prudent short-term funding strategy keeps several adequate, competitively priced sources of credit, counts implicit as well as explicit costs, and is shaped by the firm's size, credit quality, legal and regulatory setting and assets.
In short
- Firms meet immediate obligations with cash balances, operating cash flow or borrowing; failing to plan funding raises costs and the risk of financial distress.
- A prudent strategy: diversified sources, enough capacity for peak and growth needs, competitive rates and terms, and counting both implicit (e.g. forgone discounts) and explicit costs.
- Funding options depend on size, creditworthiness, legal and regulatory setting, and the assets available as collateral.
- Forecasting cash over the cycle, matching debt maturities to expected receipts and spacing maturities reduce short-term funding risk.
- When cash is needed fast, compare the cost of each source, including what must be given up to net the amount required.
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