CONTINUATION OF

SHORT-TERM
FINANCING
(CHAPTER 11)
PRESENTED BY: Ramon Raphael Q. Rancapan
a.) ACCRUALS
The longer the period of time that the firm
holds these payment, the greater the
amount of financing they provide. These
sources of financing arise spontaneously
with the firms sale. These accrued expense
items provide the firm with automatic or
spontaneous sources of financing
b.) TRADE CREDIT (AP)
Trade credit is a helpful tool for growing
businesses, when favorable terms are agreed
with a businesss supplier. This arrangement
effectively puts less pressure on cash flow
that immediate payment would make. This
type of finance is helpful in reducing and
managing the capital requirements of a
business.http://www.accaglobal.com/
(b.2) NONSPONTANEOUS NEGOTITATED
OR SHORT TERM FINANCING

Sources that require special effort

or negotiation. The major sources
of negotiated short-term credit are
bank loans, commercial paper, and
accounts receivable/inventory loan
b.2.a.) SHORT-TERM BANK
LOANS
Vary in type , availability and
cost. The most common type is
the commercial bank loan that is
for a specific purpose, short-term
and self liquidating
b.2.b.) LINE OF CREDIT

If a firm does not wish to borrow

until the working capital is
actually required, it may arrange
a credit arrangement with a
large commercial bank.
LINE OF CREDIT
ARRANGEMENT
Informal arrangement a bank agrees to lend up to a
specified maximum amount of funds during a designated
period.
Revolving credit arrangement a legal commitment
by the bank to extend credit up to some maximum
amount for a few months or several years. This is a
formal line of credit often used by large firms who pay an
annual commitment fee of about of 1% on the unused
balance to compensate the banks for making the
commitment.
c.) COMMERCIAL PAPER

An unsecured short-term (six

months or less) promissory note
sold in the money market by
highly credit-worthy firms. Big
firms use commercial paper to
finance their working capital
because it is much less
d.) PLEDGING OR ASSIGNMENTOF
ACCOUNTS RECEIVABLE
1.)Accounts receivables are considered by many
lenders to be prime collateral for a secured
loan. Under pledging arrangement, the
borrower simply pledges or assigns accounts
receivable as security for a loan obtained from
either a commercial bank or a finance company.
The amount of the loan is stated at a percent of
the face value of the receivables pledged.
2.) If all the accounts receivable are
pledged as collateral for the loan and the
lender has no control over the quality of
the accounts receivable being pledged,
the loanable value is set at a relative low
percent generally ranging downward
from a maximum of around 75 percent.
3.) However, of the lender
could select and assess the
creditworthiness of each
individual account being
pledged, the loan value might
reach as high as 85% or 90%
4.) One primary advantage
of pledging of accounts
receivable as a source of
short-term financing is its
flexibility.
5.) Cost of Financing: A
disadvantage associated with
this method of financing is its
relatively high cost owing to the
interest rate charged on loans
which is 2% to 5% higher than
the banks prime rate and
e.) FACTORING ACCOUNTS
RECEIVABLE

involves the outright

sale of the firms
accounts receivable
to the finance
f.) INVENTORY FINANCING
A firm may borrow against inventory to
acquire funds. The extent to which
inventory financing may be employed is
based on the marketability of the
pledged goods, their associated price
stability, and the perishability of the
product.
Some of the typical
arrangements by which
inventory can be used to
secure short-term
financing are:
1) Blanket inventory lien
This gives the lender a general
lien or claim against the
inventory of the borrower. The
borrowing firm maintains full
control of the inventories and
continues to sell and replace
2) Trust receipts/chattel
mortgage agreement A trust
receipt is an instrument
acknowledging that the borrower
holds the inventory and proceeds
from sales in trust for the lender.
3.) Warehousing Goods are physically
identified, segregated and stored under
the direction of an independent
warehousing company. The warehousing
firm issues a warehouse receipt for the
merchandise which carries title to the
goods represented therein.