Final answer:
Short-term external financing helps businesses cover immediate financial needs and includes options such as Trade Credit, Bank Overdraft, Commercial Paper, and Factoring. These are chosen based on the needs and strategy of the business, including considerations of control and repayment obligations.
Step-by-step explanation:
The four main types of short-term external financing are Trade Credit, Bank Overdraft, Commercial Paper, and Factoring. These are crucial for businesses that need to manage cash flow, cover short-term liabilities, or finance immediate operational needs. Trade Credit refers to deferred payments for goods and services purchased by a business, Bank Overdraft allows businesses to withdraw more money than they have in their account up to an agreed limit, Commercial Paper is an unsecured promissory note with a fixed maturity of no more than 270 days, and Factoring involves selling accounts receivable to a third party at a discount to get immediate cash.
Firms can raise financial capital in several ways, including from early-stage investors, by reinvesting profits, by borrowing through banks or bonds, and by selling stock. These methods are chosen based on various factors, such as the amount required, the cost of capital, and the level of control business owners are willing to share. Each option comes with its advantages and disadvantages in terms of control, repayment, and financial obligations to investors or creditors.