Most promissory notes are negotiable instruments that can be sold when the money is needed immediately. Unsecured Bank Loans. Banks and other financial institutions offer unsecured short-term loans to businesses at interest rates that vary with each borrower's credit rating. Figure 19.6 traces the fluctuations in the average prime rate charged by U.S. banks from 1990 to 1995. Banks generally offer unsecured short-term loans through promissory notes, a line of credit, or a revolving credit agreement.
Commercial paper is a short-term promissory note issued by large corporations.
Sources of Secured Short-Term Financing. If a business cannot obtain enough capital through unsecured short-term financing, it must put up collateral to obtain additional financing it needs. Almost any asset can serve as collateral, but inventories and accounts receivable are the assets most commonly used for short-term financing. Loans Secured by Inventory. Finished goods, work in process, or raw materials can be pledged as collateral for short-term loans.