Short term of Financing

1. WELCOME TO OUR
PRESENTATION

3. GROUP MEMBERS ARE
NAME ID
Estiak Ahmed 151-11-4357
MD. Muwas Mia 151-11-4362
Dipu Roy 151-11-4348
M M Robaead 151-11-4352
Mirza Khalid 151-11-4353

6. WHAT IS SHORT TERM OF FINANCING???

7. WHY DO FIRMS NEED SHORT-
TERM FINANCING?
 Cash flow from operations may not be sufficient to
keep up with growth-related financing needs.
Firms may prefer to borrow now for their inventory or
other short term asset needs rather than wait until they
have saved enough.
Firms may prefer short-term financing instead of
long-term sources of financing.

9. Internal sources External sources
Intuitional Non-institutional
Provision for depreciation Commercial Bank Trade credit
Outstanding expenses Investment Bank Outstanding expenses
Provident fund
Insurance Bank Mortgage
Seles fixed assets Developing Bank Bond and Debenture
Over use fixed assets Specialize financial
institutions
Friends and relatives

10. Advantage of trade credit
• Available- Trade credit almost automatic, no
negotiations.
• Flexibility- If farm’s sales increase trade credit
will grow automatically. When sales decrease
trade credit decrease.
• No restriction- It has no restriction.

12. Negotiated Short Term Financing
 We consider short-term sources of financing
whose receipt requires the firm’s
negotiation.
 Short-term bank loans are an important
source of negotiated short-term financing
for many firms.
 Whenever firms have a short-term need for
funds that can’t be satisfied with trade credit
and internally generated funds.

13. SHORT- TERM BANK LOANS
There are many kinds of short-term bank loans.
Single loan: Loan is used for specified period of time.
It’s evidenced by a promissory note.
Lines of credit: It is an agreement a firm to borrow up to
some specified maximum amount from a bank. Line of
credit must be negotiated, with renewals renegotiated.
Revolving credit: It is a formal agreement by a bank.
Requiring it to provide credit up to some maximum
established limit.

15. SHORT-TERM FINANCING
ADVANTAGE & DISADVANTAGE
ADVANTAGE DISADVANTAGE
Flexibility Security is open required
Convenience Small business often pay higher
interest
Availability Amount is smaller than long
term
Lower cost than long term
debt

16. Visible Annual Cost Of Forgoing Cash Discount
percent cash discount
100% - percent cash discount
= x 365
N
Where N=Number of day
Example: 2/10 net 30
2%
100% -2%
= x 365
30-10
= 37.24%

17. COST OF SHORT-TERM LOANS
We need to identify, interest rate is calculation
Interest = Rate x Principle x Time
Interest = 6% x $1,000 x 90/360 = $15
Example: You borrow $1000 from a bank for 3 month, at
a stated rate of 6%, Find the effective interest rate?

19. I=INTEREST
L=LOAN PRINCIPAL
i=INTEREST RATE
T=TIME PERIOD
t= TAX
L0= NET LOAN PROCCEDS
CB=COMPENSATING BALANCE
m= THE NUMBER OF TIME PERIODS PER YEAR
R= EFFECTIVE INTEREST RATE
CALCULATING SHORT TERM BANK LOAN

20. Example : A few tax out a 500000 loan for 60 days at a
nominal interest ret of 8% .If the loan is discounted and if a
10% compensating balance is required .Determined the after
text cost of the loan if the firm tax rate is 30%The banker’s
year is used .
 Given That:
L= 500000
i= 8% = 0.08
T= 60 Day’s
C.B= 10% = 0.10
TAX= 30% = 0.30

21. Effective
Interest Rate
Cost (interest + fees)
Amount you get to use
=
I= L x i x T
=500000 x 0.08 x 60 /360
=6667
C.B= 500000 X 0.10
=50000
Lo= L- I – C.B
=500000 – 6667 – 50000
= 443333
r= I/Lo x m
=6667/443333 x 365/60 x 100
=9.15%
Tax= r (1-t)
=9.15%(1- 0.30)
=6.41%