When you need to raise capital you need to find a debt instrument to do so. This is something that corporations and governments have been doing for many decades. Individuals may also use short-term debt instruments to raise funds in a hurry and pay back like a short term loan. These are alternatives to applying for a standard loan. A debt instrument is a tool that is used for precisely this purpose. It's a type of documented obligation that can help an entity acquire funding in exchange for the legally binding promise to repay the investor or the lender according to terms that have been agreed upon by the contract of the debt. It usually involves the provision of collateral and an agreed-upon schedule of interest-bearing payments with a maturity time frame. According to Investopedia, a short-term debt instrument is one that must be repaid within a year of its origination debt in the current liabilities part of the balance sheet of the company receiving the proceeds. Here are five short-term debt instruments for consideration.
1. Commercial Paper
According to Bizfluent, Commercial paper is a short-term debt instrument that provides funding within 270 days maximum or sometimes sooner, depending on the contractual agreement. Commercial Paper is a collection of promissory notes with short term maturity dates. Both companies in need of capital and investors benefit from Commercial paper. It's an inexpensive way to finance special projects or to fund operations while extending the due date on the debt. Commercial Notes are used for the express purpose of obtaining short-term financing for corporations and other companies.
2. Treasury Bills
Bizfluent also recommends the use of Treasury Bills use as a short-term debt instrument. The maximum maturity date for Treasury Bills is 52 weeks or one full year. Depending on the preferences of the investors and issuing companies, these short-term funding options may mature anywhere from a few days from issuance through one year. This type of debt instrument does not come with a set interest rate. Instead, they are sold at a discounted price to their actual face value at maturity. Some Treasury Bills go for as low as $100, representing a small investment that can be purchased in larger amounts, or used for investors interested in making small investments. While the return isn't extremely high for Treasury Bill investments they're an excellent means of attaining funding for businesses who need short-term funding. They also help investors to get their feet wet with minimal risk when building their initial investment portfolios.
Economic Times suggests that a Mortgage is another debt instrument that can be taken out against the equity that a homeowner has in his or her owned properties. If you won a residential property and you have substantial equity, you might be able to borrow against the amount that you own. While most mortgages are longer-term debt instruments, some institutions will grant an equity loan against the home you own. Some will allow you to enter into a repayment schedule that is equal to one year or less. The main problem with using a mortgage against your home or business property is that a failure to make the agreed-upon payments could result in losing the property. If you default on such a loan, there is a high probability that the issuer will take legal action to sell the home and collect on the debt if it is used as collateral to obtain the short-term funding. There is a lot at stake when you take out a mortgage as a means of short-term debt management.
Bonds are another type of debt instrument worth considering according to Economic Times. These are favored by investors looking for a low-risk investment strategy for short-term portfolio diversification. Issuers are usually either government, central bank, or large companies who back them by securities. Lenders or investors enjoy the benefit of a fixed interest rate on bonds. The maturity date for bonds may be established as short term or as a low term, depending on the needs and desires of the issuer. A bond is essentially the same thing as a bond when you look at the definition of a loan and compare the two. When bonds have a maturity date that is one year in duration or less it is considered to be a short-term debt instrument.
5. Money Market Mutal Funds
Zacks recommends considering Money Market Mutual Funds as a short-term debt instrument. This type of fundraising strategy can be compared to short-term commercial paper. These funds aren't FDIC insured, nor are they insured by any other agency of the government, but they are considered to be low-risk for investors. They're also attractive to investors because they pay higher interest rates than some other short-term debt instruments. They may also access funds through drafts or special access cards that are branded by the issuer. Investors may use this as a short-term debt instrument when they need to raise funds, but they work in the same manner for the issuer who is looking for an extra infusion of capital for operating or special project expenses.
Both investors and the issuing organizations can benefit from short-term debt instruments. Investors who have an upcoming project in a year can look forward to an extra boost when their investments mature. The companies issuing the bonds, mutual funds, commercial paper, or treasury bills, benefit with extra funding immediately. It all amounts to the recipient receiving immediate funds to work with with a promise to pay it back in the future. In most cases, everyone benefits from the transactions. We selected the lowest-risk options for your consideration, however, it is important to note that all investments do come with the risk of default from the issuer. Although rare, it can happen, particularly in rough economic times.
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Written by Allen Lee
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