Professional Documents
Culture Documents
Short Term Financing
Short Term Financing
of
Short-Term
Financing
Term paper
By: Group C
CONTENT
I.
Reference/Bibliography ..12
The ultimate source of capital is, of course, the investor, but there are
a number of ways by which a business may endeavor to obtain the
finance it requires with the maximum of certainty and the minimum of
expense. When seeking to capitalize a business, it is essential to know
the amount of finance required, and the type of undertaking and its
relevant circumstances. However, it is equally important that the
search for funds should be made when the appeal is likely to have the
desired effect. It is necessary, therefore, to consider the various
methods of raising capital together with the conditions in which a
business finds it expedient to apply them.
The repayment term of short term financing is usually shorter than
one year. Creditworthiness is an important aspect which the
entrepreneur or the venture must satisfy before any short term
financing will be granted. The following aspects are considered when
assessing creditworthiness.
Character: The reputation of honesty and reliability.
Capacity: The business sense of the borrower, the level of experience
and business history.
Circumstances: The general business circumstances in the industry
and the economy.
Insurance Cover: The extent of the cover of insurable risks taken out
by the borrower.
Guarantees: The lender may require the borrower to use assets to
guarantee the loan.
Important sources
Trade cycle
Accrual
Bank loan
Commercial paper
Give Up the Cash Discount: - If the firm choose to give up the cash
discount, it should pay on the final day of the credit period. There is an
implicit cost associated with giving up a cash discount. The cost of
giving up a cash discount is the implied rate of interest paid to delay
payment of an account payable for an additional number of days. In
other words, the amount is the interest being paid by the firm to keep
its money for a number of days.
Effects of Stretching Accounts Payable:
A strategy that is often employed by a firm is stretching accounts
payable- that is, paying bills as late as possible without damaging its
credit rating. Such a strategy can reduced the cost of giving up a cash
discount.
Source: Suppliers of merchandise
Cost or condition: No stated cost except when a cash discount is
offered for early payment.
Characteristics: Credit extended on open account for 0 to 120 days. It
is largest source of short term financing.
Formula:
Cost of giving up cash discount =
CD
100-CD
360
N
CD
360
N
Accruals
A spontaneous source of short term business financing is accruals.
Accruals are liabilities for service received for which payment has yet
to be made. The most common items accrued by a firm are tax and
wages. Because taxes are paid to the government, their accrual cannot
be manipulated by the firm. However the accruals of the wages can be
manipulated to some extent. These is accomplished by delaying
payment of wages, there by receiving the interest free loan from the
employees who are paid after some time.
Source: The main sources of the accruals are employees and
government.
Cost and condition: It is a cost free, interest free, & non conditional
loan
Characteristics: it is a result of wages and taxes which are paid at
discrete point of time. Hard to manipulate this kind of source.
Formula:
Annual saving = (cost of fund (in %)
payroll amount)
Bank loan
Banks are the major source of unsecured short term loans to business.
The major types of loan made by the banks to the business are the
short term, self-liquidating loan. That is an unsecured short term loan
in which the use to which the borrowed money is put provides the
mechanism through which the loan is repaid. Banks lends unsecured,
short-term funds in three basic ways: through single- payment notes,
lines of credit, and revolving credit agreements.
borrower who needs funds for a specific purpose for a short period.
The instruction is the note, signed by the borrower, that state terms
of the loan, including the length of the loan and the interest rate.
Interest amount
.
amount borrowed- interest
365
.
no. of days fund used
100%
360/no. of days
365
.
no. of days fund used
360/no. of days
365
.
no. of days fund used
360/no. of days
10
COMMERICAL PAPER
Large, well-established companies sometimes borrow on a short-term
basis through commercial paper & other money market instruments.
Commercial paper represents an unsecured, short-term, negotiable
promissory note sold in the money market. Because these notes are a
money instruments, only the most creditworthy companies are able to
use commercial paper as a source of short-term financing.
The commercial paper market is composed of two parts: the dealer
market and the direct-placement market. Industrial firms, utilities, and
medium sized finance company all the commercial paper through
dealers. The dealer organization is composed of a half dozen major
dealers who purchase commercial paper from the issues and, in turn,
sell it to investors. The typical commission a dealer earns is 1\8
percent, and maturities on dealer-placed paper generally range from
30 to 90 days. Although the dealer market has been characterized in
the past by significant number of issues who borrowed on a seasonal
basis, the trend is definitely toward financing on a revolving or more
permanent basis.
Source: business firm both non financial and non-financial.
Cost and condition: Generally 2% to 4% below the prime rate of
interest.
Characteristics: An unsecured short term promissory note issued by
the most financially sound firm.
Formula:
Annual percentage cost= Interest cost + placement cost
Net amount used
360
.
maturity date
360/no. of days
11
Reference/Bibliography
A.
B.
C.
D.
--The End--
12