Short Term Financing
Short Term Financing
Short Term Financing
Short-Term
Financing
11-1
11-2
Short-Term Financing
11-3
Spontaneous Financing
Negotiated Financing
Factoring Accounts
Receivable
Composition of Short-Term
Financing
Spontaneous Financing
Types of spontaneous
financing
Accounts
Payable
(Trade Credit from Suppliers)
Accrued
11-4
Expenses
Spontaneous Financing
Trade Credit -- credit granted from one
business to another.
Examples of trade credit are:
Open
Notes
11-5
Spontaneous Financing
Trade Acceptances: the seller draws a draft on
the buyer that orders the buyer to pay the draft
at some future time period.
Net
11-7
Seasonal
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
(100% - % discount)
11-10
365 days
(100% - 2%)
365 days
S-t-r-e-t-c-h-i-n-g
Account Payables
Postponing payment beyond the end of the
net (credit) period is known as stretching
accounts payable or leaning on the trade.
Possible costs of stretching
accounts payable
11-13
Advantages of
Trade Credit
Compare costs of forgoing a possible
cash discount against the advantages
of trade credit.
11-14
11-15
Accrued Expenses
Taxes
11-16
Spontaneous Financing
Paper
Bankers Acceptances
Unsecured Loans*
Line
of Credit
Revolving Credit Agreement
Transaction Loan
* Secured versions of these three
11-17
Stand-Alone
Commercial Paper
Commercial Paper -- Short-term, unsecured
promissory notes, generally issued by large
corporations (unsecured corporate IOUs).
11-18
Bank-Supported
Commercial Paper
11-19
Bankers Acceptances
Bankers Acceptances -- Short-term
promissory trade notes for which a bank (by
having accepted them) promises to pay
the holder the face amount at maturity.
11-20
Short-Term
Business Loans
11-21
Unsecured Loans
11-22
Unsecured Loans
Revolving Credit Agreement -- A formal, legal
commitment to extend credit up to some
maximum amount over a stated period of time.
11-23
Unsecured Loans
11-24
Cash balances
Other
11-25
= 10.00%
= 11.11%
$100,000 in interest
$850,000 in usable funds
11-28
= 11.76%
($600,000) x (10%)
= $ 60,000
Commitment
Fee:
($400,000) x (0.5%)
=$
Compensating
Balance:
($600,000) x (5%)
= $ 30,000
Usable Funds:
$600,000 - $30,000
= $570,000
$60,000 in interest +
$2,000 in commitment fees
2,000
= 10.88%
365 days
Assume the same loan described on slide 11-29 except that the loan
is for 270 days and the 10% rate is on an annual basis. What is
the EAR?
11-31
Secured
(or Asset-Based) Loans
11-32
Marketability
Life
Riskiness
Accounts-ReceivableBacked Loans
11-33
Accounts-ReceivableBacked Loans
Types of receivable loan arrangements:
11-34
Inventory-Backed Loans
11-35
Marketability
Perishability
Price stability
Cash-flow ability
Types of
Inventory-Backed Loans
11-36
Factoring
Accounts Receivable
Factoring -- The selling of receivables to a
financial institution, the factor, usually
without recourse.
11-37
Factoring
Accounts Receivable
Factoring Costs
11-38
Composition of
Short-Term Financing
The best mix of short-term
financing depends on:
Cost of the financing method
Availability of funds
Timing
Flexibility
Degree to which the assets are
encumbered
11-39