November 22, 2013
Short-term investments encompass a myriad of sources for businesses that are seeking additional funds to support their operations and/or maintenance or to earn higher interest rates on cash earned in their business versus depositing the funds into a traditional savings account which offer lower yields over a shorter period of time. These investment accounts are current assets shown on a business’ balance sheet that provide liquidity within a shorter time frame. Sources of short-term investments include: trade credit, bank loans, corporate promissory notes, foreign borrowing, and loans against receivables and inventory (Block, Hirt, & Danielson, 2009).
Trade credits are offered by manufacturers or sellers of goods or services to businesses in the form of accounts payable which are generally extended for 30 to 60 days, but can be extended up to 180 days depending on the type of business and the creditor. Extending the payment period is an option, but can diminish the business’ credit rating and relationship with the supplier which is why cash discounts that reduce the repayment amount are offered for payments made within the specified timeframe. This type of investment can be essential in financing growth when used responsibly as capital to purchase equipment, materials, or replenish their stock without cash (Entrepreneur, 2013). Bank loans are a self-liquidating, short-term option for cash when a business is expanding or looking to supplement operational cost. The rates and fees charged are based on the business’ credit-worthiness using the prime rate or London Interbank Offered Rate (LIBOR) as the base in addition to compensating balances. Commercial papers are unsecured short-term promissory notes issued by a company for a discounted rate based on the market, with maturities ranging up to 270 days, as a means of financing accounts receivable, inventories, or other short-term liabilities (Investopedia, 2013). This type of investment is cheaper than a bank loan, but it is…