Short-term Financing

Working Capital Management

Working Capital Management

Financing decisions for

Management of
Working Capital
Current Assets (Cash,
(Accounts Payable,
Accounts Receivable,
External Sources of
Inventory)
Credit)
Short-Term Financing

Used for meeting

Liabilities scheduled
day to day operation
for repayment
like wages, salary,
within one year.
inventory & etc.
 Differences Short-Term Long-term
Financing Financing

Cost Lower Higher

Short-Term Risk Higher Lower

Financing Use of Funds

Working
Fixed Assets
Capital

Amount Lower High

 Sources of Short – Term
Financing

Unsecured
Secured Short-
Short-Term
Term Financing
Financing

Non-
Spontaneous Spontaneous Inventory Receivables
(Negotiated) Financing Financing

Trade Credit Commercial

(Accounts Bank Loans Floating Lien Pledging AR
Paper
Payable)

Accruals Factoring AR
Transaction Loan Trust Receipt

Deferred Income
Warehouse
Line Credit
Receipt

Revolving Credit
 Cost of Trade Credit
• Act of obtaining funds by delaying payments to the suppliers.
• Trade Credit usually bears no interest, but it is not costless. Its cost is
implicit in the terms of credit agreed upon.
 Jun Traders, a merchandising firm, purchases merchandise
form its suppliers on credit terms of 2/10, net 30. What is the
annual Cost of Trade Credit?

Sample Problem –
Trade Credit
 • Without Compensating Balance
• Non-Discounted

• Discounted

Cost of • With Compensating Balance

• Non-Discounted

Bank • Discounted

Loans Generally,
 GEM Traders was granted a 200,000 bank loan with 12%
stated interest. Interest is paid at maturity.

= 12%

If the money is borrowed at the same stated annual

interest rate but interest is paid in advance.

Sample Problem –
Bank Loans = 13.63%
 If the money is borrowed at the same stated annual
interest rate but the company is required to maintain a
compensating balance of 10,000 under non-discounted
loan.

= 12.63%

If the money is borrowed at the same stated annual

interest rate but the company is required to maintain a
Sample Problem – compensating balance of 10% under a discounted loan.
Bank Loans
= 15.38%
 Cost of Commercial Paper
• Short term, unsecured notes issued by firms with high credit standing.
 Sample Problem –
Commercial Paper

Giant Corp. plans to sell a 180-day

commercial paper amounting to
100,000,000 which it expects to pay a
discounted interest of 12% per annum.
It expects to incur 100,000 in dealer *interest = P100M X 12% X 180/360 = 6M
placement fees and paper issue costs.
 Malyn Corp. a large shipbuilder has just issued
1 million worth of commercial paper that has a
90-day maturity and sells for P990,000.

Sample Problem –
Commercial Paper
4.04%
 Cost of Factoring
• Sale of receivables (with recourse, notification basis)
 a. Net Proceeds from Factoring
Sample Problem –
Factoring of AR
Face Amount 200,000
Less: Holdback Reserve (200K x 6%) 12,000
Factor’s fee (200k x 2%) 4,000 (16,000)
Balance 184,000
AR Company has P200,000 in
receivable that carries 30-day credit Less: Interest (184,000 x 12%x30/360) (1,840)
term, 2% factor’s fee, 6% holdback Net Proceeds 182,160
reserve, and an interest of 12% per
annum on advances. b. Cost of Financing
a. How much is the net proceeds?
b. Compute for effective annual
financing cost of Factoring