4. Definition :
Short term finance, often referred to as
bridging finance, usually refers to loans
mostly offered on terms of up to 12 months.
5. Types Of Short Term Financing :
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Bank Over Draft
Trade Credit
Bank Loans
Credit Cards
6. Why Do Firms Need Short Term Financing?
Firms may prefer to borrow now for their
inventory or other short term asset needs
rather than wait until they have saved enough.
Cash flow from operations may not be
sufficient to keep up with growth – related
financing needs.
7. Financing that rises and falls with the volume of
sales activity during normal operations of the firm
without further negotiation with creditors or
lenders.
Spontaneous Financing :
8. Types Of Spontaneous Financing :
Accounts Payable (Trade Credit from
Suppliers)
Accrued Expenses.
9. Trade Credit :
It is a source of short term business finance
lent for a specific period of time to a business to
pay for goods that they have received. Trade
Credit cycle usually runs for a period of 28
days.
10. Examples Of Trade Credit :
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Open
Accounts
Notes
Payable
Trade
Acceptances
The supplier ships required goods to the
buyer who, after receiving and checking
the related shipping documents, credits
the supplier's account in their books
with the invoice amount.
A written promissory note
that the buyer signs which
evidences as a debt to the
seller.
The seller draws a draft on the
buyer that orders the buyer to pay
the draft at some future time
period.
11. Terms Of The Sale :
Cash on Delivery (COD):
The buyer pays cash on delivery.
Cash before Delivery (CBD):
The buyer pays cash before delivery.
12. Net Period - No Cash Discount :
When credit is extended, the seller specifies
the period of time allowed for payment.
For example - “Net 30” implies full payment
in 30 days from the invoice date.
13. Net Period - Cash Discount :
When credit is extended, the seller specifies the
period of time allowed for payment and offers a cash
discount if paid in the early part of the period.
For example - “2/10, net 30” implies full payment
within 30 days from the invoice date less a 2% discount
if paid within 10 days.
14. Seasonal Dating:
Credit terms that encourage the buyer of
seasonal products to take delivery before the
peak sales period and to defer payment until
after the peak sales period.
16. Trade Credit as a Means of Financing
What happens to accounts payable if a firm purchases $1,000/
day at “net 30”?
$1,000 x 30 days = $30,000 account balance
What happens to accounts payable if a firm purchases $1,500/day at
“net 30”?
$1,500 x 30 days = $45,000 account balance
A $15,000 increase from operations
19. Approximate annual interest cost =
% discount
(100% - % discount)
X 365 days
(payment date -
discount period)
20. Stretching Account Payables
Accounts payable is money owed by a business to its
suppliers shown as a liability on a company's balance
sheet. It is distinct from notes payable liabilities, which
are debts created by formal legal instrument
documents.
Stretching Accounts Payable means postponing payment
21. What happens if we stretch account payables?
Cash Discount if
forgone
Late payment as
penalties or interest
Deterioration in
credit rating
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22. Trade Credit
an arrangement to buy goods or services on
account without making immediate cash or
cheque payments.
23. Bearers the cost of Trade Credit
Suppliers – when they cannot impose on the buyers
through higher prices of products/goods
Buyers- when they are ready for higher prices
Both- partial imposition on the buyers by sellers
24. There are three main indirect costs of trade credit as there is no
direct cost involved:
*loss of early payment discount
*spoiling your relationship with your supplier if you do not
adhere to the agreed trade credit terms
*working capital cost if the net effect of receiving and providing
trade credit puts your business in a negative working capital
situation.
25. Advantages of trade Credit :
*an agreement can be very easy to organize
*an agreement is relatively easy to maintain, as long as the
conditions are met
*can be used by most business, for supplies of goods or services
*businesses are protected by late payment legislation
*a potentially low-cost form of working capital finance.
26. Accrued Expenses
*Amounts owed but not yet paid
*Short Term Liability
*Transactions to be recorded at the times of their
occurrence
Example- wages, taxes, dividends
33. Advantages :
Cheaper than a short-term
business loan from a
commercial bank.
Dealers require a line of credit to
ensure that the commercial paper is
paid off.
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34. What is “Bank Supported” Commercial paper :
A bank provides a letter of credit, for a fee,
guaranteeing the investor that the company’s
obligation will be paid.
35. Letter of credit (L/C) -- A promise from a third party
(usually a bank) for payment in the event that certain
conditions are met. It is frequently used to guarantee
payment of an obligation.
37. Unsecured Loans :
A form of debt for money borrowed that is
not backed by the pledge of specific assets.
Secured Loans :
A form of debt for money borrowed in which
specific assets have been pledged to guarantee
payment.
38. Unsecured Loans :
Line of Credit (with a bank) -- An informal
arrangement between a bank and its customer
specifying the maximum amount of unsecured credit
the bank will permit the firm to owe at any one time.
39. Unsecured Loans :
Transaction Loan -- A loan agreement that meets
the short-term funds needs of the firm for a
single, specific purpose.
57. Factoring Costs
Composition of
Short-Term Financing
* Cost of the financing method
* Availability of funds
* Timing
* Flexibility
*Degree to which the assets are encumbered