This document summarizes short-term and long-term financing options for businesses. It discusses sources of short-term debt like trade credit, bank loans, and internal funds management. Long-term debt options include bank loans, bonds, and public stock sales. It also covers managing finances through working capital, capital budgets, and financial controls. The overall purpose is to provide an overview of the major categories of funds sources for businesses and how financial managers can utilize different financing strategies and tools.

1. Financial Management
Chapter 18, Part 2
INTRODUCTION TO BUSINESS
PREPARED BY: SHAFAYET ULLAH
SECTION: A3 AND A4

2. Efficient Sources of Funds
 Major categories of fund sources for a business:
 Debt capital: Funds obtained through borrowing
 Equity capital: Funds provided in exchange for some
ownership in the firm.

3. Short-Term Financing: Debt Capital
 Used to obtain money to finance current operations
 Repayment required within one year
 May come from several sources:
Trade credit
Family and friends
Commercial banks
Internal funds management

4. Short-Term Financing
 Trade Credit
 Most widely used source of short-term financing
 Credit given by suppliers for the purchases the firm
makes from these suppliers
• Family and friends
 For funds needed for a short time
 Extra risk: If business goes sour, not only is there
loss of business but loss of relationships too!

5. Short-Term Financing
 Commercial banks
Bank loans come in many different forms;
 Unsecured loans:
Most difficult loans to get from a bank
Issued on the good credit of the borrower and
requires no collateral
**New businesses have difficulty getting these loans

6. Short-Term Financing
Commercial Banks
 Secured loans
Backed by some form of collateral ( Reduces risk for
the banker)
**Where borrower fails to pay the loan, lender may
take possession of property, equipment, inventory or
accounts receivable.
** Pledging: Using accounts receivable as collateral
for a loan

7. Short-Term Financing
 Commercial Banks
 Line of credit: A preapproved amount the holder may
borrow in whole or in part, provided that the bank has
sufficient funds
 Revolving Credit Agreement: Guarantees that the bank will
honor the company’s line of credit up to the stated amount
(generally requires payment of a fee)
 Factoring: The sale of accounts receivable to a bank or
other lender, generally at a considerable discount.
** Seller receives less than the full value of the accounts
receivable.
 Floor-planning: Borrowers will assign the title to their
inventory to the bank as a collateral (Borrowers pay off loan
as inventory sold)

8. Short-Term Financing: Internal Funds
Management
 Close review of balance sheet and accounting ratios
 Overdue accounts receivable can be collected more
quickly/ Discount may be offered for early payment
 Inventory reduction ( manager must remember to
retain adequate inventory)
 Cost cuts, expense reduction

9. Long-Term Financing: Loans
 Loans:
 Direct loans- Generally given to higher risk
business, at lower interest rates.
 Guaranteed loan: Loan actually comes from a private
lender ( beneficial for small business owners)
 Term loan agreement/ promissory note: Requires
the borrower to repay the loan according to a
schedule of specified installments ( either at
fixed/flexible rate of interest

10. Requirements for Long-term loans
 Some form of collateral ( real estate, machinery,
equipment or stock)
 When determining interest rates for loans, banks will
look at;
 Length of time the loan is for
 Type of collateral
 The firm’s credit rating
 General level of market interest

11. Long-Term Financing: Bonds
 Bond: An agreement between a firm and an investor
with specific terms spelled out in an indenture
** IOU with an investor stipulates periodic interest
payments (every 6 months) and payment of the
principal at maturity (10 yrs/more)
 Secured bond: Backed by some form of collateral
(real estate, inventory) that will pass to the
bondholders if company does not live up to
agreement terms.
 Unsecured/debenture bonds: Backed by the good
name of the issuing company.

12. Long-Term Financing: Bonds
 Junk bonds: Designates a low-grade bond issued by
financially weak companies with no solid collateral.
** Funds internal expansion, corporate acquisitions
** Have very high interest rates
• Callable bonds: Give the company the right to
purchase back its bonds early ( Slightly higher rate of
interest, company pays a premium to the holder
when the bonds are called)
• Convertible bonds: Can be paid off with stock in the
company. Amount of stock indicated in the
indenture terms.

13. Long-term Financing: Public sale of stock
 Stocks: Shares of ownerships
 Shareholder receives a stock certificate (shows the
name of the shareholder, number of shares of stock
owned, special characteristic of stock)
 Authorized stock: All the shares of stock that can be
sold at any time
 A company will typically, sell only a portion of their
authorized stock, shares sold are called issued stock.
(Unsold shares- unissued stock).

14. Other forms of Long-term financing
 Leverage: Use of long-term debt to raise needed cash
(Works to maintain higher rates of return on owner’s
investments)
 Equity capital
 Retained earnings: Profits chosen by owner to leave in
the company rather than pay them off as dividends
 Contributions
 Sale of partnerships
 Venture capital: Funds provided by individual/
organizations to new firms with high growth potential.
Investor receives a share of the ownership and share of
control.

15. Managing Finances Of The Firm
 Managing working capital
 Developing capital budgets
 Developing financial controls

16. WORKING CAPITAL
 Current assets minus the current liabilities
 Current assets of cash, accounts receivable and
inventory must be managed
 Cash must always be earning interest income
 Accounts receivable must be collected quickly
 Inventory must be kept to the minimum needed to
satisfy customer demand
 Accounts payable should be paid in time to take
advantage of cash discounts.

17. Capital Budgets
 Represent funds allocated for future investments of
the firm’s cash
 Investments: Plant expansion, equipment
improvement
 Capital budget has limited funds ( requires
evaluation of all proposed capital expenditures for
maximum return)
 Determining long term rate of return difficult:
Depends on customer response, competitive
reactions, state of the economy.

18. Summary of the specific duties of the financial
manager
 Responsible for maintaining proper flow of funds
 Managing uses of funds
 Help find sources of funds
 Finding appropriate investments for excess cash
 Managing the company’s working capital and capital
budgeting process
 Developing appropriate financial controls
** When comparing actual and projected results
manager must look for deviations and corrective
action taken.

19. Financial Management
Chapter 18, Part 2
Thank You