Company Financing

Short-term financing.
Short-term financing refers to business or personal loans that have a shorter-than-average
timespan for repaying the loan, typically one year or less. Some short-term loans have even
shorter terms, such as 90 to 120 days.
Short-term financing is designed to help borrowers finance for an immediate need without the
burden of long-term financing, though short-term loans typically feature higher interest rates
than regular loans. In many cases, short-term loans are used to help a business build up
inventory or raise capital when temporary deficiencies in funding occur. For example, if a
business needs to meet expenses or payroll while waiting on clients to pay invoices, a shortterm financing option may help the business acquire the capital needed to make expenses
when it has the means or ability to repay the loan within a short period of time.
To acquire short-term financing, the business or individual provides a lender with documentation
to show cash flow, income and revenue or assets that can be used as collateral for the loan.
Some lenders provide unsecured or signature loans for borrowers with a steady payment history
and higher credit rating. With unsecured and signature loans, it is not necessary to provide
assets as collateral.
Short-term financing is a method of raising funds involving financial obligations that need to be
repaid within a year or less. It is a fast and flexible way for companies to obtain working capital
for their daily operations when their cash flow is insufficient. The main disadvantage is that a
company may become too reliant on short-term funds and vulnerable to high interest rates and
banking fees. This may adversely affect profit margins. Short-term financing can cover payroll,
utility charges and the purchase of raw materials by the business. Overdrafts, short-term bank
loans, and trade credit are types of short-

Speed
Short-term loans can be obtained much faster than long-term financing. Lenders do not make
as thorough an examination of a companys accounts for short-term lending as they do in the
case of long-term loans. Small- and medium-size companies often do not have large cash
reserves and are vulnerable to sudden financial shocks such as bankruptcy or of non-payment
by a key debtor.

Flexibility
Small companies often have seasonal variations in cash flow and need access to capital over
that period. Overdraft protection is a form of short-term finance where a bank agrees to pay a
companys checks, electronic debits, and cash withdrawals to a certain limit. The lender charges
a fee for this facility and interest on any balance outstanding. The costs of long- term debt may
be greater than those for such a short-term facility. Lenders can charge a premium if a debtor
repays a long-term loan before its maturity. But the drawback to this kind of short-term finance
flexibility is that the bank may withdraw the overdraft protection on short notice.

Management
Lenders who extend short-term financing do not involve themselves in company management
or in the business decisions about capital investment. Long-term finance is accompanied by a
number of provisions, such as limits on other financial arrangements or caps on the salaries of
company principals that restrict the business actions. Too much short-term financing is
dangerous for small businesses.

Risk
Market circumstances, such as a recession, may push small businesses into borrowing too
heavily on a short-term basis. Short-term finance can be a serious risk for the borrower. A shortterm loan may be renewed by the lender on much less favorable terms than the original
contract. Not only is the business faced with the high cost of the capital, it may not be able to
service the accumulated debt. This leaves the company in a weak position where it could face
bankruptcy.

Characteristics of Short Term Financing |

In the conduct of its business a firm obtains its fund from a variety of sources. While the funds
may also arise from earnings retained in the business. There are some characteristics of short
term financing. The characteristics of short term financing are given below:

1. Duration: Short term financing embraces the borrowing or lending funds for short period
of time say one year or less.

2. Cost of funds: Short term financing can provide both the highest and lowest cost of
funds in the firms capital structure. Some firms of short terms financing are more costly
than intermediate or long term funds. On the other hand some short term sources
provide funds at no cost at all to the firm payable and accruals fall into this category.
3. Use of short term financing: there is a common tendency for greater use short term
financing among small and lesser use among large concerns. It is prevalent in practice
that all types of business funds it quite difficult to raise long term funds resulting on
account credit standing and relative importance of many small units.
4. Sources of short term financing: short term finance deals with the commercial bank,
trade credit and other sources of funds that have to be repaid within a year or less.
Trade credit is the privilege extended by suppliers to their customers of delaying
payment of goods purchased, sometimes for a period of a month or more.
5. Renewal or recycling: this occurs when short term liabilities are continually refinanced
from financing must by definition be repaid in less than one year, some sources provide
funds that are continuously rolled over. The funds provided by payable. For example,
may remain relatively constant because as some account ate created.
6. Clean up: this occurs when commercial banks or other lenders require the firm to pay
off its short term obligation. Just as some sources are rolled over, some must be
reduced to O, or cleaned up, at one point in the year. This is requirement of a bank credit
where the clean-up offers proof that the short term financing is being used to meet short
term or cyclical needs only.
7. Speed: a short term loan can be obtained much faster than long term credit. Lenders
will insists on a more through financial examination before extending long term credit
and the loan agreement will have to be spelled out in considerable detail because a lot
can happen during the long life the firm should look to short term markers.
8. Less restrictive: short term loan agreement are generally less restrictive. Long term
loan agreements always contain previsions or covenants, which constrain firms future
action these ate almost absent in short term loan.
9. Easy collection and control: it is easy to collect and control short term loan. No
formalities are needed to raise funds from short term source.
10. Security: short term financing does not require any security to raise the funds.
11. No prepayment penalty: there is no prepayment penalty provision in case of short
term credit, which is expensive. Accordingly if a firm thinks its need for fund will diminish
in the near future it should choose short term debt.
Practically all enterprises use the short-term credit as sources of finance. We find in the
balance sheets of almost all the companies some kinds of current liabilities which are the
indicator of the uses of short term finance in business.
The size of business has an important bearing on the use of short term finance. There is
variation in the use of short term finance between the large and small sized business
establishments. In practically all types of business, there is lesser use of short term credit

among larger concerns. The small concerns make more use of short term financing on account
of lower average credit standing and impermanent nature of business.

Sources of Short Term Financing.

Trade Creditors: Trade creditors are probably the most important single source of short term
credit. Trade creditors are those business establishments which sell good to others on credit.
That is, they do not require payment on the spot; rather they are to be paid after some days
from the date of sale.
Customers Advances: Customers often finance the seller through advance payment for the
goods. The prices of the goods to be purchased are paid in advance, i.e. before the receipt of
the goods. This practice is prevalent where the seller does not wish to sell goods without
prepayment and the buyer also cannot purchase goods from other sources. The seller might
require advance it the quantity of goods ordered is so large that he cannot afford to tie up more
fund in raw materials or in good-in-process. Special type machine manufactures often demand
advance payment in order to protect them from the loss caused by cancellation of contract at a
time when the machine has been built up or is in work in process.
Commercial Banks: The commercial banks of a country generally supply funds to the business
concerns on a short-term basis, either with security or without security if the customer is
financially established. The banks, collecting scattered savings of the people, invest a portion of
the deposits in the business for a short period of time.
Finance Companies: Finance companies usually lend money to business. They are
specialized financial institutions and their primary function is to advance funds to the business
Commercial Paper House: They are specialized financial agencies and they are created to
purchase promissory notes and to sell them, in turn, to other investors who desire to have some
shot of short-term liquid assets. The firm having high credit standing can use this source for
obtaining short-term funds.
Personal Loan Companies: These companies make small loans to individual generally for
consumption purposes. The small business undertakings can procure fund form such
companies
Governmental Institutions: There are some governmental and semi-governmental
corporations which are authorized to advance short term funds to business concerns. Their
importance is of course not so much less than other sources.
Factors or Brokers: In one basic respect, factoring is different from other forms of financing. In
other forms funds are granted to one individual largely on the basis of his property. Factoring is
based on a different philosophy. In considering a companys request for funds we are more
interested in the men behind the company their ability, their hopes and aspirations for the future.
Miscellaneous Sources: There are many more sources from which can secure funds for short
period. They arefriend and relatives, public deposits, loan from officer and the company
directors and foreign exchange banks

Advantages of Short-Term Financing:

Easier to Obtain: Short term credit can be more easily obtained than long term credit. A firm
which poor credit standing may be unable to obtain long term funds but it can procure, at least
some trade credit from sellers who are anxious to increase their sales. The short-term creditors,
by granting loans, assume less risk than long term creditors because there is less chance of
substantial change in the financial soundness of the creditor within a few weeks or months
time.
Lower cost: Short term credit may be obtained with lower cost than the long term finance
because of priority of creditors in general. Because of the prior position given creditors in the
matter of claim to income and to assets in dissolution they generally will accept a relatively low
interest.
Flexibility: Due to seasonal nature of business many firms have a temporary demand for shortterm funds to carry heavier inventories. Most enterprises are in constant need of short term
funds. Short-term financing is flexible in the sense that the firm is able to secure funds as they
are needed and repay then as soon as the need vanishes. Funds may be needed to meet the
daily, weekly or monthly requirements. Such funds can be advantageously supplied by short
term credit. It long term credit is secured to finance the daily or weekly or seasonal variations, it
would become inflexible because long term funds cannot be repaid as soon as the need for
funds vanishes.
No Sharing of control: Obtaining funds form short term creditors prevents the inclusion of
more owners through the procurement of owners funds. This results in maintaining the position
of control by the existing owners. Because the creditors have no voice in the operations of the
business.
Availability: In many cases, particularly for small enterprises short term credit is the only source
available. It may not be possible for a small firm to obtain long term funds because of poor credit
standing. Long-term credit is not generally granted without adequate margin of protection which
the small firms may not be able to provide with. The small business has then recourse to short
term funds.
Tax Savings: The cost of short term funds are deductible for income tax purposes while the
dividend paid to the owners is not deductible. Thus a substantial tax-savings may result from the
use of short-term funds.
Convenience: Short Term credit can be more conveniently secured than the other types of
funds. It is more convenient to pay labour weekly or employees monthly than every day

Medium term finance.

Medium term sources of finance are those that a company pays back in 1 to 5 years, and they
include bank loans, hire purchases and leases. Some countries' governments also offer special
programs that offer medium term financing for companies and Financial Institutions. The
purpose of such financing is to help companies expand or buy assets.

When companies choose loans for medium term financing, they have to pay interest and may
also have to show they have enough assets to serve as security for the loan. A hire purchase is
similar to a loan but is when a company buys a specific asset and pays installments to the
seller; the interest rate is usually higher than for loans. Leasing is an option for companies who
want to rent an asset and possibly someday buy out the lease

Hire purchase
A hire purchase is a method of buying goods through making installment payments over time.
The term "hire purchase" originated in the United Kingdom and is similar to rent-to-own
arrangements in the United States. Under a hire purchase contract, the buyer is leasing the
goods and does not obtain ownership until the full amount of the contract is paid.
To begin a hire purchase, a payment is often required up front. The rest of the amount due is
submitted through scheduled payments, similar to an installment loan or a vehicle lease. The
ownership of the good purchased through a hire purchase is not officially transferred to the
buyer until all required payments have been submitted. Companies offering hire purchase
options earn a profit by applying additional costs to the monthly payment which serves as
interest charges for the purchase.
Hire purchase is an arrangement whereby a company acquires an asset by paying an initial
installment (e.g. 40% of the total) and repays the other part of the cost of the asset over a period
of time or term for a contract, in which a purchaser agrees to pay for goods in parts or a
percentage over a number of months. Sometime it is called as installment plan although this
may differ slightly as in a hire purchase agreement, the ownership of the good remains with the
seller until the last payment is made.
The hire purchase agreement was developed in the United Kingdom in the 19th century to allow
customers with a cash shortage to make an expensive purchase they otherwise would have to
delay or forgo. For example, in cases where a buyer cannot afford to pay the asked price for an
item of property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase
contract allows the buyer to hire the goods for a monthly payment. When a sum equal to the
original full price plus interest has been paid in equal installments, the buyer may then exercise
an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods
to the owner.
If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor
protection not available with unsecured-consumer-credit systems. HP is frequently
advantageous to consumers because it spreads the cost of expensive items over an extended
time period. The need for HP is reduced when consumers have collateral or other forms of
credit readily available.
These contracts are most commonly used for items such as car and high value electrical goods
where the purchasers are unable to pay for the goods directly.

Standard provisions of hire purchase

To be valid, hire purchase agreements must be in writing and signed by both [parties].They must
clearly lay out the following information in a print that all can read without effort:
1. A clear description of the goods.

2. The cash price for the goods.

3. The hire purchase price, i.e., the total sum that must be paid to hire and then purchase
the goods
4. The amount of deposit.
5. The monthly installments (most states require that the applicable interest rate is
disclosed and regulate the rates and charges that can be applied in HP transactions)
and
6. A reasonably comprehensive statement of the parties' rights (sometimes including the
right to cancel the agreement during a "cooling-off" period).
7. The right of the hirer to terminate the contract when he feels like doing so with a valid
reason.

Advantage of hire purchase

There are advantages of hire purchase which are as follows,
1. Hire purchase allows companies to control and deploy assets without significant drain on
working capital.
2. Fixed-rate funding makes budgeting easy as the lessee has clear sight of future
expenditures.
3. Flexibility of repayment structuring is available to allow for seasonal business (e.g. one
repayment a year), and to reduce monthly outlay by factoring in a balloon payment at
the end of the term.
4. Leasing prevents the risk of an assets value depreciating quickly and provides flexibility
to enter into a new contract at the end of the original leases fixed term.
5. Financing asset purchases can be more tax efficient than standard-term loans due to
lease payments being booked as expenses. Although asset depreciation also provides
tax benefits, the useable lifetime of the asset will vary depending on the asset and on
local regulation.
6. High accessibility of financing for businesses due to the financing being secured with the
leased asset and the asset being owned by the financing company.
7. In certain circumstances there is maintenance included within the terms of the
agreement.

Disadvantage of hire purchase.

The disadvantages of hire purchase are as follows,
1. Total sum of capital payment for hire purchase will be higher than the full payment on the
asset purchase.
2. Administrative complexity and costs will be greater if any covenants are applied to the
arrangement - for example, updates on change of equipment locations.
3. if the business changes its strategy, resulting in the leased asset no longer being useful,
there can be early termination charges or restrictions on subleasing

Credit sale
Consumer credit sale means any sale with respect to which consumer credit is extended or
arranged by a seller to a consumer, permitting him/her to use the goods or services during the
term of payment. The seller who issues credit in a consumer credit sale is a person who is
regularly engaged in credit transactions and the buyer is a person other than an organization.
The goods or services that are purchased under a consumer credit sale are goods or services
primarily required for personal, family, or household purpose. The debt under consumer credit
sale can be paid in installments, otherwise a credit service charge will be made upon the buyer
Under a credit sale agreement one purchase the goods at the cash price. You usually have to
pay interest but some suppliers offer interest free credit. Repayment is made by instalments
until you have paid the whole amount.
Youre the legal owner of the goods as soon as the contract is made and the goods cant be
returned if you change your mind. The supplier cant repossess the goods if you fall behind with
repayments but they can take court action to recover the money owed if youre in arrears.
Interest free offers can be tempting and can be a good deal. As long as you keep to the
payments you wont be charged interest. Goods may not be cheaper this way
Consumer credit sale also includes any contract in the form of a lease or bailment in which a
lessee or a Bailee contracts to pay as compensation an amount that is equivalent to or in
excess of the value of the goods or services involved for the reason of using the goods or
services. A Bailee or a lessee also agrees to become the owner of the property upon full
compliance of his/her obligation under the contract.

Lease
A lease is a legal contract, and thus enforceable by all parties under the contract law of the
applicable jurisdiction.

A lease is a legal contract between two or more parties outlining the terms and conditions under
which one party agrees to rent a property which is owned by another party. It guarantees
the lessee, the tenant use of an asset and guarantees the lessor, the property owner or
landlord, regular payment from the lessee for a specified number of months or years. Both the
lessee and the lessor face consequences if they fail to uphold the terms of the contract.
Leases are the legal and binding contracts that set forth the terms of rental agreements in real
estate. If a person wishes to rent an apartment or other residential property, for example, the
lease prepared by the landlord describes the monthly rent amount, when it is due each month,
what happens if the lessee fails to pay his rent, how much of a security deposit is required, the
duration of the lease, whether the lessee is allowed to keep pets on the premises, how many
occupants can live in the unit and any other essential information. The landlord requires the
tenant to sign the lease, thereby agreeing to its terms before occupying the property.
Consequences for breaking leases range from mild to damaging, depending on the
circumstances under which they are broken. A tenant who breaks a lease without prior
negotiation with the landlord faces a civil lawsuit, a derogatory mark on his credit report or both.
As a result of breaking a lease, a tenant may also encounter problems renting a new residence,
as well as other issues associated with having negative entries on a credit report. Tenants who
need to break their leases often must negotiate with their landlords or seek legal counsel. In
some cases, finding a new tenant for the property or forfeiting the security deposit inspires
landlords to allow tenants to break their leases with no further consequences.
Some leases have "early termination" clauses that allow tenants to terminate the contracts
when their landlords do not fulfill their contractual obligations. For example, a tenant may be
able to terminate a lease if the landlord does not make timely repair the property.

Other Types of Leases

Tenants who lease commercial properties sign various types of leases structured to put more
responsibility on the tenant and provide greater up-front profit for the landlord. For example,
some commercial leases require the tenant to pay rent plus the landlord's operational costs,
while others require tenants to pay rent plus property taxes and insurance.
General terms
A lease is a legal contract, and thus enforceable by all parties under the contract law of the
applicable jurisdiction. Some specific kinds of leases may have specific clauses required by
statute depending upon the property being leased, and/or the jurisdiction in which the
agreement was signed or the residence of the parties.
Common elements of a lease agreement include:

Names of the parties of the agreement.

The starting date and duration of the agreement.

Identifies the specific object (by street address, VIN, or make/model, serial number)
being leased.

Provides conditions for renewal or non-renewal.

Has a specific consideration (a lump sum, or periodic payments) for granting the use of
this object.

Has provisions for a security deposit and terms for its return.

May have a specific list of conditions which are therein described as Default Conditions
and specific Remedies.

Termination clause (describing what will happen if the contract is ended early or
cancelled, stating the rights of parties to terminate the lease, and their obligations)

All kinds of personal property (e.g. cars and furniture) or real property (e.g. raw land,
apartments, single family homes, and business property (including wholesale and retail)) may
be leased. As a result of the lease, the owner (lessor) grants the use of the stated property to
the lessee.

Trade credit
Trade credit is a kind of business credit which is extended by the seller of goods to the buyer of
the same at all levels of production and distribution process down to the retailer. Before the
goods and services have reached the ultimate users or consumers, they pass through many
hands starting from the producers down to the retailer. Trade credit is used by various agencies
operating in the trade channel between the producer and the retailer. For example, the producer
may extend credit to the wholesaler, who may also facilitate the retailers trade by extending
credit to him. Such credits extended by the wholesaler to the retailer or producer to the
wholesaler are known as trade credit.
Trade credit has been defined as the short-term credit by a supplier to a buyer in connection
with purchase of goods for ultimate resale. This definition makes it clear that trade credit is a
different type of credit than the consumer credit and installment sale credit. Trade credit is a
credit extended for the purchase of goods with the ultimate purpose of resale. The credit
accepted for the purchase of goods which are consumed by the purchaser is not trade creditit
becomes consumer credit. So a credit, in order to be designated as trade credit, must be
extended in connection with the purchase of goods which must be resold.
Advantages /Reasons for use Trade Credit:
1. It increases profit
2. Convenience of Informality
3. Flexibility
4. Less Risk

5. Less Costly
6. The only Source
7. Existence of Business
One of the most important reasons for the use of trade credit is its cheapness. Trade credit, in
most cases, is cheaper than other sources of credit, obtaining funds form finance companies or
banks gives rise to many complications. The lender may impose restrictions on the action of the
management. The rate of interest to be paid on the funds is also determined in advance. In
trade credit no specific rate of interest is to be paid.
Trade credit is also used as a matter of convenience. It is convenient to obtain, because the
purchaser receives the goods from the seller when the latter sends the goods on receipt of the
order form the former. The purchaser is to make payment on a stipulated date. But obtaining
finance from the financial institutions is not so easy. Many formalities are to be performed to
obtain funds from such institutions.
Trade credit has also got widespread use because of the fact that it is less risky than other
sources of funds. If the credit cannot be repaid by the end of the credit period, the trade
creditors usually dont proceed to liquidate the firm. If the default is only for a few weeks or a
month and does not occur frequently, the creditor may not even be heard from.
When other sources of obtaining funds are closed to a business organization trade credit may
be obtained easily. This is especially true of small concerns. Such enterprises do not usually
possess a good credit standing and thats why, they cannot approach big lending intuitions for
loans.
The banks, insurance companies and other finance companies hesitate to lend funds to the
business enterprises that are small in size and financially weak. They fear that these enterprises
would not be able to repay the debt on maturity. As such, the small business concerns rely
mostly on trade credit.

Disadvantages of Trade Credit:

1. Cost of Trade Credit
2. Frequent Maturity
3. Insolvency

Overdraft
The first overdraft facility was set up in 1728 by the Royal Bank of Scotland. The merchant
William Hog was having problems in balancing his books and was able to come to an
agreement with the newly established bank that allowed him to withdraw money from his empty
account to pay his debts before he received his payments. He was thus the first recipient of
cash credit from a bank in the world. Within decades, the advantages of this system, both for

customers and banks, became apparent, and banks across the United Kingdom adopted this
innovation into service.
An overdraft is an extension of credit from a lending institution when an account reaches zero.
An overdraft allows the individual to continue withdrawing money even if the account has no
funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank
allows customers to borrow a set amount of money.
If you have an overdraft account, your bank covers checks that would otherwise bounce and get
returned without payment. As with any loan, you pay interest on the outstanding balance of an
overdraft loan. Often, the interest on the loan is lower than credit cards. In many cases, there
are additional fees for using overdraft protection that reduce the amount available for overdraft
protection, such as insufficient funds fees per check or withdrawal.
Your bank can opt to use its own funds to cover your overdraft. Another option is to link the
overdraft to a credit card. If the bank uses its own funds to cover your overdraft, then it typically
won't affect your credit score. When a credit card is used for the overdraft protection, it's
possible that you can increase your debt to the point where it could affect your credit score.
However, this won't show up as a problem with overdrafts on your checking accounts.
If you don't pay your overdrafts back in a predetermined amount of time, your bank can turn
your account over to a collection agency. This collection action can affect your credit score and
get reported to the three main credit agencies. It depends on how the account is reported to the
agencies as to whether it shows up as a problem with an overdraft on a checking account.

Overdraft Protection as a useful Tool

Overdraft protection provides you with a valuable tool to manage your checking account. If you
forget to take out money for a trip to Starbucks, overdraft protection ensures that you don't have
a check returned and reflect poorly on your ability to pay. However, banks charge a fee and
make money from this service; make sure you use the overdraft protection sparingly and only in
an emergency situation.
The amount of overdraft protection varies by account and by bank. In some cases, the customer
needs to request the addition of overdraft protection. If the overdraft protection is used
excessively, the financial institution can remove the protection from the account.

Reasons for overdrafts.

Overdrafts occur for a variety of reasons. These may include:

Intentional loan The account holder finds himself short of money and knowingly
makes an insufficient-funds debit. He accepts the associated fees and covers the
overdraft with his next deposit.

Failure to maintain an accurate account register The account holder doesn't

accurately account for activity on his account and overspends through negligence.

ATM overdraft - Banks or ATMs may allow cash withdrawals despite insufficient
availability of funds. The account holder may or may not be aware of this fact at the time
of the withdrawal. If the ATM is unable to communicate with the cardholder's bank, it may
automatically authorize a withdrawal based on limits preset by the authorizing network.

Temporary deposit hold A deposit made to the account can be placed on hold by the
bank. This may be due to individual bank policies. The funds may not be immediately
available and lead to overdraft fees.

Unexpected electronic withdrawals At some point in the past the account holder
may have authorized electronic withdrawals by a business. This could occur in good
faith of both parties if the electronic withdrawal in question is made legally possible by
terms of the contract.

Merchant error A merchant may improperly debit a customer's account due to human
error. For example, a customer may authorize a 500.00 purchase which may post to the
account for 5000.00. The customer has the option to recover these funds
through chargeback to the merchant.

Chargeback to merchant A merchant account could receive a chargeback because of

making an improper credit or debit card charge to a customer or a customer making an
unauthorized credit or debit card charge to someone else's account in order to "pay" for
goods services from the merchant. It is possible for the chargeback and associated fee
to cause an overdraft or leave insufficient funds to cover a subsequent withdrawal or
debit from the merchant's account that received the chargeback.

Authorization holds When a customer makes a purchase using his debit card without
using his PIN, the transaction is treated as a credit transaction. The funds are placed on
hold in the customer's account reducing the customer's available balance. However, the
merchant doesn't receive the funds until he processes the transaction batch for the
period during which the customer's purchase was made. Banks do not hold these funds
indefinitely, and so the bank may release the hold before the merchant collects the funds
thus making these funds available again. If the customer spends these funds, then
barring an interim deposit the account will overdraw when the merchant collects for the
original purchase.

Bank fees The bank charges a fee unexpected to the account holder, creating a
negative balance or leaving insufficient funds for a subsequent debit from the same
account.[3]

Playing the float The account holder makes a debit while insufficient funds are
present in the account believing he will be able to deposit sufficient funds before the
debit clears. While many cases of playing the float are done with honest intentions, the
time involved in the cheque clearing and the difference in the processing of debits and
credits are exploited by those committing check kiting.

Returned check deposit The account holder deposits a cheque or money order and
the deposited item is returned due to non-sufficient funds, a closed account, or being
discovered to be counterfeit, stolen, altered, or forged. As a result of the cheque
chargeback and associated fee, an overdraft results or a subsequent debit which was
reliant on such funds causes one. This could be due to a deposited item that is known to
be bad, or the customer could be a victim of a bad cheque or a counterfeit check scam.
If the resulting overdraft is too large or cannot be covered in a short period of time, the
bank could sue or even press criminal charges.

Intentional Fraud An ATM deposit with misrepresented funds is made or a cheque or

money order known to be bad is deposited (see above) by the account holder, and
enough money is debited before the fraud is discovered to result in an overdraft once the
chargeback is made. The fraud could be perpetrated against one's own account, another
person's account, or an account set up in another person's name by an identity thief.

Bank error - A cheque debit may post for an improper amount due to human or
computer error, so an amount much larger than the maker intended may be removed
from the account. Some bank errors can work to the account holder's detriment, but
others could work to their benefit.

Victimization The account may have been a target of identity theft. This could occur
as the result of demand-draft, ATM-card, or debit-card fraud, skimming, cheque forgery
or an account takeover. The criminal act could cause an overdraft or cause a
subsequent debit to cause one. The money or cheque from an ATM deposit could also
have been stolen or the envelope lost or stolen, in which case the victim is often denied
a remedy.

Intraday overdraft A debit occurs in the customers account resulting in an overdraft

which is then covered by a credit that posts to the account during the same business
day. Whether this actually results in overdraft fees depends on the deposit-account
holder agreement of the particular bank.

Factoring
The origin of factoring lies in overseas trade among nations. It became a part of doing business
in England as early as the 1400s, and came to America with the Pilgrims in 1620. Like all
financial tools, factoring has evolved over the years. It grew in the United States as an effective
way for companies to build more cash flow, due to limitations companies faced securing loans in
the nations fragmented banking system.
Factoring is a transaction in which a business sells its accounts receivable, or invoices, to a
third party commercial financial company, also known as a factor. This is done so that the
business can receive cash more quickly than it would by waiting 30 to 60 days for a customer
payment. Factoring is sometimes called accounts receivable financing.
The terms and nature of factoring can differ among various industries and financial services
providers. Most factoring companies will purchase invoices and advance money within 24
hours. The advance rate can range from 80% to as much as 95% depending on the industry,

customers credit histories and other criteria. The factor also provides back-office support. Once
it collects from the customers, the factor pays the reserve balances of the invoices, minus a fee
for assuming the collection risk. The benefit of factoring is that, instead of waiting one to two
months for a customer payment, you now have that cash in hand to operate and grow your
business.
A factor allows a business to obtain immediate capital based on the future income attributed to a
particular amount due on an account receivable or business invoice. Accounts receivable
function as a record of the credit extended to another party where payment is still due. Factoring
allows other interested parties to purchase the funds due at a discounted price in exchange for
providing cash up front.
Factoring is not a loan. No debt is assumed by factoring. The funds are unrestricted, providing a
company more flexibility than with a traditional bank loan.

Factoring in Five Simple Steps

1. You perform a service for your customer.
2. You send your invoice to a factoring company.
3. You receive a cash advance on your invoice from the factoring company.
4. The factoring company collects full payment from your customer.
5. The factoring company pays you the rest of your invoice amount, minus a fee.

Advantages of Factoring
There are several reasons why factoring is a valuable financial tool for many businesses. The
key benefit is that factoring provides a quick boost to your cash flow. Many factoring companies
provide cash on your accounts receivable within 24 hours. This can solve short-term cash flow
issues and help fuel the growth of your business. Factoring companies handle your customer
collections, and may also evaluate your customers credit and payment histories.

Some other major benefits include:

Factoring can be customized and managed so that it provides necessary capital

when your company needs it.

The financing does not show up on your balance sheet as debt.

Factoring is based on the quality of your customers credit, not your own credit or
business history.

Factoring provides a line of credit based on sales, not your companys net worth.

Unlike a conventional loan, factoring has no limit to the amount of financing.

Factoring aligns well with start-up businesses that need immediate cash flow.

Example to illustrate a common factoring situation:

1. ABC Transport is a trucking company that wants to double the size of its fleet over the next
two years and serve more clients in the West. The company has just landed a new customer on
the West Coast who needs freight shipped from Kansas City to Los Angeles. The customer will
pay for the service within 30 days, but that wont cover the immediate fuel, payroll and
maintenance costs of running the route. The owners of ABC Transport have been in this
situation before. They feel that the lack of available cash flow has prevented the company from
taking on new business.
ABC Transport turns to a factoring company, selling the West Coast customers invoice in
exchange for a 90 percent advance on the total amount within a day. The influx of cash
replenishes the trucking companys reserves, allowing it to run the Kansas City-Los Angeles
route. Factoring also gives ABC Transport the flexibility to take on new customers as well.
2. Assume a factor has agreed to purchase an invoice of $1 million from Clothing Manufacturers
Inc., representing outstanding receivables from Behemoth Co. The factor may discount the
invoice by say 4%, and will advance $720,000 to Clothing Manufacturers Inc. The balance of
$240,000 will be forwarded by the factor to Clothing Manufacturers Inc. upon receipt of the $1

million from Behemoth Co. The factor's fees and commissions from this factoring deal amount to
$40,000.
Note that the factor is more concerned with the creditworthiness of the invoiced party Behemoth Co. in the example above - rather than the company from which it has purchased the
receivables, Clothing Manufacturers Inc. in this case. Although factoring is a relatively expensive
form of financing, factors provide a valuable service to companies that operate in industries
where it takes a long time to convert receivables to cash, and to companies that are growing
rapidly and need cash to take advantage of new business opportunities.

Bill of exchange
A bill of exchange is a binding agreement by one party to pay a fixed amount of cash to another
party on of a predetermined date or on demand. Bills of exchange are primarily used in
international trade. Their use has declined as other forms of payment have become more
popular.

There are three entities that may be involved with a bill of exchange transaction.
1. Drawee: This party pays the amount stated on the bill of exchange to the payee.
2. Drawer: This party requires the drawee to pay a third party (or can be paid by the drawee).
3. Payee. This party is paid the amount specified on the bill of exchange by the drawee.

A bill of exchange normally includes the following information:

1. Title: The term "bill of exchange" is noted on the face of the document.
2. Amount: The amount to be paid, expressed both numerically and written in text.
3. As of: The date on which the amount is to be paid. Can be stated as a certain number of
days after an event, such as a shipment or receipt of a delivery.
4. Payee. States the name (and possibly the address) of the party to be paid.
5. Identification number: The bill should contain a unique identifying number.
6. Signature: The bill is signed by a person authorized to commit the drawee to pay the
designated amount of funds.
Issuers of bills of exchange use their own formats, so there is some variation from the
information just noted, as well as in the layout of the document.

A bill of exchange is transferable, so the drawee may find itself paying an entirely different party
than it initially agreed to pay. The payee can transfer the bill to another party by endorsing the
back of the document.
A payee may sell a bill of exchange to another party for a discounted price in order to obtain
funds prior to the payment date specified on the bill. The discount represents the interest cost
associated with being paid early.
A bill of exchange does not usually include a requirement to pay interest. If interest is to be paid,
then the percentage interest rate is stated on the document. If a bill does not pay interest, then it
is effectively a post-dated check.
If an entity accepts a bill of exchange, its risk is that the drawee may not pay. This is a particular
concern if the drawee is a person or non-bank business. No matter who the drawee is, the
payee should investigate the creditworthiness of the issuer before accepting the bill. If the
drawee refuses to pay on the due date of the bill, then the bill is said to be dishonored.