Updated for the 2026-2027 CFA® Level I curriculum.
Corporations and financial institutions use short-term funding to manage working capital, seasonal needs, and daily liquidity. The best alternative depends on access, collateral, maturity, flexibility, and rollover risk.
Quick Answer
Short-term funding includes bank credit, commercial paper, certificates of deposit, interbank borrowing, and secured borrowing such as repos. Compare alternatives by effective cost, maturity, collateral, market access, flexibility, and the risk that funding cannot be renewed when it matures.
Key Takeaways
Bank facilities can provide committed or flexible liquidity.
Commercial paper is short-term unsecured market funding for qualifying issuers.
Certificates of deposit are funding instruments issued by banks.
Secured funding uses collateral and may lower lender exposure.
Repeated short maturities create rollover risk.
What You Need to Know for CFA Level I
Match a borrower's need with a plausible funding source.
Distinguish secured from unsecured funding.
Compare cost with access, flexibility, and risk.
Explain why the lowest quoted rate may not be the best overall choice.
Repo mechanics are covered in the next note. Money-market yield conventions belong on the separate yield-measures note.
Why Issuers Need Short-Term Funding
A company may finance inventory before receiving customer cash. A bank may need overnight liquidity to settle payments or manage reserves. Short-term borrowing bridges a temporary gap without locking the issuer into long-term capital.
Bank and Market-Based Funding Alternatives
Short-term borrowers differ in credit quality, collateral, and access to investors. Compare the instruments by who provides the cash, whether security is required, and how the funding matures.
Alternative | Typical user | Main feature |
|---|---|---|
Bank line or loan | Companies and banks | Negotiated, potentially flexible access |
Commercial paper | Creditworthy companies or financial issuers | Short-term unsecured market borrowing |
Certificate of deposit | Bank | Deposit-based funding with a stated maturity |
Interbank borrowing | Bank | Very short-term borrowing from another bank |
Repo | Financial or other market participant | Short-term borrowing secured by securities |
Secured vs Unsecured Short-Term Funding
Secured funding gives the cash provider a claim on pledged collateral. Unsecured funding depends more directly on the borrower's credit standing. Collateral may improve access or pricing, but it also creates valuation, margin, and operational requirements.
How to Compare Funding Alternatives
Start with effective cost, then test maturity, availability, collateral, flexibility, documentation, and rollover risk. Committed bank access can be valuable even if an uncommitted source quotes a lower rate. A borrower that continually renews short debt remains exposed to changing rates and market access.
Working Example
A highly rated retailer needs funds for seasonal inventory for 60 days. It may compare commercial paper with a bank line based on cost, certainty, and backup liquidity. A bank that needs cash overnight and owns high-quality securities may prefer a repo because it can pledge those securities. The appropriate choice follows the borrower's access and the timing of the need.
Common Exam Traps
Choosing the lowest quoted rate without comparing the full funding terms
Fees, collateral requirements, credit access, and the maturity of the need can change the effective cost and suitability.
Ignoring rollover risk
Repeatedly renewing short-term borrowing can expose the issuer to higher rates or a closed funding market before its assets generate cash.
Confusing the borrower with the investor
Commercial paper raises short-term funds for the issuer; an investor who buys it holds a money-market claim. Determine whose funding decision is being tested.
Treating repo and commercial paper as equivalent unsecured borrowing
A repo is collateralized by securities, while commercial paper is generally unsecured. That distinction changes access, pricing, and counterparty exposure.
Practice Question
A highly rated corporation wants to raise unsecured funds directly from investors for a short period. Which instrument is most consistent with that need?
Commercial paper
A long-term secured bond
Common equity
Correct Answer: Option A
Commercial paper is a short-term, unsecured instrument commonly used by highly rated corporations to borrow directly from investors.
Option B: A long-term secured bond does not match the issuer’s need for short-term, unsecured funding.
Option C: Common equity represents ownership and permanent capital rather than short-term borrowing.
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FAQs About Short-Term Funding Alternatives
What short-term funding alternatives can corporations use?
They may use bank credit, commercial paper, secured borrowing, and other market-based facilities depending on access.
How do secured and unsecured short-term funding differ?
Secured funding pledges collateral; unsecured funding relies mainly on the borrower's creditworthiness.
Why does rollover risk matter for short-term borrowing?
The borrower may face higher rates or lose access when maturing debt must be replaced.