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Short-term finance, such as trade finance, often involves collateral such as accounts payable or inventories. A company will pledge or sell its receivables to the creditor in exchange for immediate cash (also called factoring). While certain corporate loans and types of project finance usually target a specific purpose such as construction or purchase of equipment, short-term loans such as working capital loans, are usually for general purposes and support the general business operations of a company.

The environmental and social issues related to a short-term finance transaction range from minimal to complex and vary according to size,industry sector, location, and company commitment to managing environmental and social risks. Because a working capital loan provides general support to a company as opposed to being targeted for equipment purchase or expansion, the financial institution is exposed to the borrower’s overall risk including potential environmental and social issues.

Reputational risk is the main concern for short-term finance, especially if borrowers have pending environmental and social issues that are highly visible and scrutinized by the public. Due to the short-term nature of the transaction and the use of collateral, the credit risk to a financial institution is limited. However, given that assets are used as collateral there may be liability risks, for example in the case of land contamination. Due to the short tenure of short-term finance, a financial institution will have limited leverage in managing environmental and social risks.

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