Short-term financing refers to loans of up to 12 months that are used to finance short-term assets and cash flow needs. Common types of short-term financing include overdrafts, trade credit, loans, and credit cards. Firms need short-term financing to finance inventory or meet growth needs when cash flow is insufficient. Spontaneous financing like accounts payable and accrued expenses also provide financing that fluctuates with sales volume without requiring additional credit. Trade credit is a major type of spontaneous financing where suppliers provide credit for 28 days.

1. Short-term
Financing

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3. What is Short-term Financing ?

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 :
1
2
3
4
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.

15. 01
Advantages of Trade Credit :
Flexibility
03
Easy Availability
Informality
1
2
3

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

17. Cost To Forgo a Discount

18. Forgo, means “to abstain from, do without”
Discount, means “a deduction from the usual cost of
something, typically given for prompt or advance
payment or to a special category of buyers”

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
1
2
3

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

27. Spontaneous Financing
Financing which flows with
the volume of sales activity during normal business
operation that requires no additional assistance
from lenders or creditors. The most common
resources for this kind of financing include accounts
payables and accruals.

28. Money Market Credit
*Commercial Paper
*Bankers’ Acceptances
Spontaneous Financing

29. Unsecured Loans
*Line of Credit
*Revolving Credit Agreement
*Transaction Loan
Spontaneous Financing

30. What Is “Stand Alone” Commercial Paper ?

31. Definition
Short-term, unsecured promissory notes,
generally issued by large corporations

32. Commercial Paper Market is composed Of :
Dealer Direct Placement
Markets

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.
1
2

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.

36. Short Term Business Loans :
Unsecured Loans
Secured Loans

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.

40. Calculate Interest Rate

41. Collect Basis
Discount Basis
Calculate Interest Rate
compensating balance
Commitment fees

42. Collect Basis
interest at maturity of the note.
Scenario: Loan=10,000
Interest=1000

43. Interest
Useable Fund
1000
10000
10%%% ==

44. Discount Basis
initial loan - interest
Scenario: Loan=10,000
Interest=1000

45. Interest
Useable Fund
1000
9000
11.11%%% ==

46. Compensating Balances
Scenario: Loan =10,000
Interest =1000
Compensating Balance =1500

47. Interest
Useable Fund
1000
8500
11.76%%% ==

48. Commitment Fees
Fees on unused portion of loan
Scenario: Loan(used+unused)=6000+4000=10000
Interest =10%
Compensating Balance =5% of used loan
Commitment rate =2%

49. Interest
Useable Fund
600+4000*0.02
5970
11.39%%% ==

50. Security For Loan
Asset as guaranty

51. Security For Loan
Factors
Marketability Life Riskiness
1 2 3

52. Accounts-Receivable-Backed Loans

53. Accounts-Receivable-Backed Loans
• Non-notification
• Notification

54. Inventory-Backed Loan
Factors

55. Types:
Floating
Lien
Chattel Mortgage
Trust
Receipt
Terminal Warehouse
Receipt
Field
Warehouse
Receipt
1 2
3
4
5

56. Factoring
Accounts Receivable
Factoring -- The selling of receivables to a
financial institution, the factor, usually
“without recourse.”

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

58. Conclusion

59. Any Question?

60. Thank You !