SOURCES OF SHORT-TERM

FINANCING
Made by- Debojyoti Patra
Dhruvin Shah
Dhwaneel parikh

There are various sources of short-term funds available
to a
firm:

Trade Credit from Suppliers

Bank Loans

Corporate Promissory Notes

Bankers Acceptances

Foreign Borrowing

Loans Against Receivables and Inventory
TRADE CREDIT FROM SUPPLIERS


The largest source of short-term financing for a firm-
over
50%
It is usually a 30-60 day grace period before a bill is
due
A cash discount is often given if payment is made
within a specified time

Ex., 2/10 net 30 means a 2% discount is given if paid in
10 days; if not, the full amount is due in 30 days
NET CREDIT POSITION

A firms Accounts Receivable (A/R) minus its Accounts
Payable (A/P)

If A/R is greater than A/P, it is a net provider of trade credit
(positive number)

If A/P is greater than A/R, it is a net user of trade credit
(negative number)

Larger firms tend to be net providers of trade credit, while
smaller firms are net users
TYPES OF SHORT-TERM BANK LOANS

Line of Credit:
company is able to draw upon a yearly borrowing facility
arranged in advance
Interest is paid only on money actually withdrawn.
revolving credits are for periods longer than 1 year
general purpose loans
Transaction Loan:
short-term loan for a specific purpose
Compensating Balance:
when a bank requires a minimum average account balance in
order to qualify for a loan
can be thought of as a form of collateral

CORPORATE AND FOREIGN BORROWING
Commercial Paper:
a short-term unsecured promissory note in minimum units of $50,000
sold (at a discount) by finance companies, other large corporations
cheaper than bank loans
total amount of commercial paper outstanding has increased greatly
in recent years
Bankers Acceptances
to finance goods in transit (particularly imports)
sold at a discount
Eurodollar Loans:
loans from foreign banks denominated in Canadian dollars are called
Eurodollar loans (U.S Eurodollars predominate)
foreign interest rates may be lower
ACCOUNTS RECEIVABLE FINANCING

A/R financing includes 3 choices:
pledging accounts receivable as collateral for a
loan
an outright sale (factoring) of receivables to a
factoring company
Asset-backed Securities: sale of receivables by
large corporations in public offerings
Tends to be a relatively expensive source of
financing.



INVENTORY FINANCING
Inventory may be assigned as collateral
security against an operating loan
For example, in a Trust Receipt or Floor
Planning
loan is based upon serial numbers on product
when goods are sold, loan is repaid
used by auto dealers, industrial equipment
dealers, television and home appliance dealers
LONGER-TERM LOANS
Term Loan (Instalment Loan):
loan for 1-7 years
interest rate may be fixed or change with prime
rate
repaid in monthly or quarterly instalments
used to buy capital assets (ex; automobiles,
property)