GROUP 8

SHORT TERM FINANCING

● MENDOZA, JAMAICA
● LAPORE, LAWRENCE
● RIVERA, JENNYVEIVE
● TAGATA, IAN
 SHORT TERM FINANCING

At the end of the chapter, students are expected to be able to:

Ø Identify the different sources of short term financing;

Ø Explain the advantages and disadvantages of short term

financing;

Ø Compute the cost and benefits of short term financing of the

firm; and

Ø Apply short term financing to made sound decision.

 SHORT TERM
FINANCING
Ø Short term financing
pertains to the obligations
that needed to be paid in
one year.
Ø Short term financing as
presented in the balance
sheet consist of all current
liabilities .
Current Liability
Ø Current liabilities are
company’s short –term
obligations that are due
within one year or within a
normal operating cycle.
Ø Current liabilities examples
are accounts payable,
interest payable, bills
payable, short term loan
and other debt that are due
within a year.
 Advantage of Short Term
Criteria for a liability to be Financing
Ø It is easier to arrange.
considered as current:
Ø It is less expensive.
a. It is expected to be settled in the
entity’s normal operating cycle
Ø It affords the borrower more flexibility.

b. It is held primarily for the purpose Disadvantage of Short

of being traded Term Financing
c. It is due to be settled within 12
Ø Interest rate fluctuates more often.
months after the balance sheet
Ø Refinancing is frequently needed.
d. The entity does not have an
Ø Delinquent payment may be
unconditional right to defer
detrimental to the credit rating of the
settlement of the liability for at least
borrower that is experiencing a liquidity
12 months after the balance sheet.
problem.
Sources of Short Term Trade Credit
Financing Ø It is an agreement between two parties; the buyer and
the seller. The buyer receives the invoice sent by the
1. Trade credit seller specifying the goods purchased, the purchase
price, the total amount to be paid and the term of
2. Stretching payables purchase.
3. Accruals
4. Short-term bank loans Ø The term offered may or may not consist of a discount.
Thus, if the buyer made the payment within the
5. Banker’s Acceptance discount period allowed by the seller, the buyer gets
6. Commercial finance company loans the discount. Otherwise, the buyer must pay the whole
7. Commercial paper amount at the end of the credit period.

8. Receivable financing Ø For instance, a credit term of 2/10, n/30 means paying
9. Inventory financing the good within 10 days from the invoice date gives the
buyer a discount of 2%. However, if no payment is
received within 10 days, the buyer must pay the whole
amount on the 30th day.
Formula to Compute the Formula for the cost of
Average Account Discount Forgone
Payable

ANNUAL PURCHASE x Credit Period

Discount% x 360_________________
360 100%-discount % final due date – discount period

Or

__________________Discount__________________
Purchase price – discount x (credit period – discount period)
360
 EXAMPLE:
Abc corporation has an annual purchase of P1,500,00. The term offered by the supplier was 2/10, n/30. The
company did not avail of the discount but it always pays on time at the end of credit period. How much is
the balance of accounts payable of ABC Corporation? What is the cost of discount forgone?
Answer:
Accounts payable= ANNUAL PURCHASE x Credit Period
360
= 1,500,000 X 30 DAYS
360
= 4, 166.6666667 X 30
= P125,000
Cost of discount forgone:
= Discount% x 360_________________
100%-discount % final due date – discount period
= 2%___ x 360 or 0.02 x 360
100%- 2% 30-10 1-0.02 30-10
= 0.02040081633 x 18

= 36.73
Cost of discount forgone:
= Discount% x 360_________________
100%-discount % final due date – discount period
= 2%___ x 360 or 0.02 x 360
100%- 2% 30-10 1-0.02 30-10
= 0.02040081633 x 18

= 36.73

Another way of getting the Cost of discount forgone:

Discount____________________________
Purchase price – discount x (credit period – discount period)
360

= 30,000__________
1,500,000 – 30,000 x (30-10)
360
= 30,000__________
4, 083.3333333 x (20)
= _30,000_
81,667
= 36.73
 EXAMPLE:
Ø ABC consider availing of the discount on the credit term offered by the supplier. The terms are 4/10,
n/60. At the time the term is offered, the borrowing rate in the market is 12% per annum. Should
ABC Corporation take advantage of the discount offered?

Ø The analysis would be as follows:

Cost of discount
= Discount% x 360_________________
100%-discount % final due date – discount period

= 4%___ x 360 or 0.04 x 360

100%- 4% 60-10 1-0.04 30-10

= 0.041666666 x 7.20

= 0.3 or 30%

Analysis: ABC company should avail the cash discount because the cost of borrowing is 12% which is less
than the cost of discount forgone. The net advantage of the firm availing the discount is 18% (30%-12%).
 Advantages of Trade Credit
1. It is immediately available from suppliers

2. Collateral is not needed. However some suppliers require a bond before granting the
trade credit

3. No interest is charges although there is an implicit cost to the company if the discount
is forgone.

4. It can be easily paid off because of the amount involve

5. It is easy to obtain

6. Trade creditors are usually generous or supportive in the event of financial difficulty
 Disadvantages of Trade Credit
1. There is a possibility of not availing of the discount due to financial
problems

2. The buyer avails of the discount but at disadvantage due to lower implicit
cost as compared with a higher cost of the bank credit

3. Not paying within the discount period may lead the firm to lower credit
rating.

DATING- Delayed billings of some purchases. For example people selling

summer outfits may place their orders as early as December, and the delivery
may take some time in February but is payable in April
 Factors Considered In Trade
Credit
1. Market condition- when economy of a country is down, firm are expected to have
stiffer offering of trade credit.

2. Financial stability- compared with more financially- stable companies, buyers

considered financially weak may find it difficult to obtain trade credit.

3. Competitiveness- sellers to retain their existing customers and generate new ones, are
more likely to be lenient in giving credits.

4. Nature of the Product- perishable product have shorter credit period as compared
with product with longer life expectancy.

5. Nature of Demand and Supply- If the supply is greater than the demand and of there
numerous suppliers of the needed materials or goods, a more lenient credit term is
expected.
 Stretching Payables
Ø Stretching Payables means paying the obligations later than expected. This form of short term financing helps the
company reduce the cost of discount. For instance the seller grace a credit term of 1/10, n/30, the cost of discount
will be:

Ø Cost of discount:
= Discount% x 360_________________
100%-discount % final due date – discount period

= 1%___ x 360 or 0.01 x 360

100%- 1% 30-10 1-0.01 30-10

= 0.01010101 x 18

= 0.1818 or 18.18%

However if it prolong its payment until 45th day the cost of discount will be:

= 1%___ x 360 or 0.01 x 360

100%- 1% 45-10 1-0.01 45-10

= 0.01010101 x 10.29

= 0.1039 or 10.39%
 ACCRUALS
● Accruals are expenses already incurred but not yet paid off by the company. Some of these
expenses are salaries and wages, taxes and interest.
● Salaries and wages are compensation given to employees. However, they are not paid daily
and accumulate for some time. With the discrepancy, the company is able to benefit from short-term
financing. The company has the power to use the funds for other operating activities until such time
that it needs to release salaries and wages. For example the company has 100 employees who earn
P250 a day and the payment of which takes place after 15 days. In these case, the company is able to
obtain a spontaneous short-term financing amounting to P375,000 (100 x P250 x 15 days) from
accrued salaries and wages.
● Taxes also accrue to the company. There are taxes which are paid monthly, quarterly, semi-
annually, and annually. The payment dates are set by the Bureau of Internal Revenue (BIR).
Regardless the scheme of tax payment, the company buys some time to use its money for other
activities before the final activities before the final settlement of taxes.
● Accrued interest payment is another source of short-term financing. The firm enters into an
agreement with a financial institution to pay interest on its borrowings. The interest accrues every
day but the payment of the interest will take place only upon reaching the agreed time of payment.
The delay of interest payment also provides a short-term fund for the company.
 EXAMPLE:
FLT Corporation obtained a 60-day short-term loan amounting to P1,000,000. The interest charge is 12%
annum. The loan was released on March 1,2021 and will mature on April 30,2012. The interest should be
paid at the end of the term. How much accrued interest did FLT Corporation have, as a form of a short-term
financing, on the followings date?

Using the formula I = Prt, the answer is as follows:

1. March 15, 2012 = P1,000,000 x 0.12 x 15/360 = P5,000

2. March 30, 2012 = P1,000,000 x 0.12 x 30/360 = P10,000

3. April 15, 2012 = P1,000,000 x 0.12 x 45/360 = P15,000

In the given example, FLT Corporation was able to obtain a short-term loan on interest amounting to P5,000,
P10,000, and P15,000 on March 15, 30, and April 15, 2012, respectively. Instead of paying the interest on
the mentioned dates, the firm has the advantage of using these funds. However, on April 30, 2012, the firm
is obliged the pay the principal plus the interest for 60 days amouonting to P1,020,000.
 SHORT TERM BANK LOANS
● These are loans secured from banks which are payable in one year. Banks obtain their money from
currents, savings and time deposits, and other special forms of accounts. They lend this money to
individuals, companies, or government agencies. As a sign of indebtedness, banks ask companies to
sign a promissory note. This document serves as proof that the company has an obligation to pay the
bank for the principal and interest when the term matures. The loans obtained from the bank are paid
off on the maturity dates or by installment. Interest, on the other hand, is collected either in advance
or at the end of the term.
There are several reasons why a company borrows money on short-term. Some of them are as
follows:
● To cover for the prices of the goods purchased
● To take advantage of the cash discount offered by the seller
● To cover for the operating activities of the company
● To cover for the down payment on the acquisition of fixed assets
● To reserve cash for the unexpected activities of the company
● To meet cash dividend payments
● Before the bank grants loan to the firm, it assesses the company for sufficient equity and good
liquidity. Firm seeking a loan are assessed based on the five C’s of credit (character, capital,
capacity, conditions and collateral).

Ø Before the loan approval, the account officer will lay out all the conditions given by the bank before
the release of such a loan. Some of them are as follows.
1. Companies are asked to deposit a compensating balance; that is, they are required by lending banks
to maintain a minimum balance at low-cost account like current or savings account.
2. The rate given is based on the prime rate, the London interbank offered rate (LIBOR), an additional
rate above the prime or LIBOR, or a rate which the bank thinks as reasonable.
3. The loan may be given as a limp sum or on a piecemeal basis depending on the approving officer.
The reason for it is that the approving officer may still be wary of the company’s performance and
would like to protect he bank’s best interest.
4. Collaterals to be offered by the company, if any
5. The amount of the loan to be given
 Factors in Choosing the Bank
1. The firm must know the bank’s line of expertise. Some banks are highly specialized in a field which
is not related to the company's line of operations. Knowing the business is a big factor in identifying
the most efficient way of utilizing cash management, investment in marketable securities, control of
receivables, inventories and other financial matters. Banks that know the business well will receive the
company a lot of time and money.

2. The loyalty of the bank regarding its willingness to stand by it's borrowing customers through
difficult time must be checked.

3. The company should choose a bank capable of handling the firm’s borrowing requirements and
depository transactions, service charges, compensating balance requirements and interest rates.

4. A bank whose interest rate is highly competitive with other banks is preferable.
Types of Bank
Financing
UNSECURED LOANS
In banking terms, an unsecured
loan is a clean loan. Loans not
back up by any form of
collateral.
SECURED LOANS
In the firm does not qualify for
an unsecured loan, It can apply
for a secured loan.
CREDIT LINE
This is a type of loan granted by
banks to a firm on a periodic
basis, normally for 1 year, and
up to a specific amount.
INSTALLMENT
LOANS
These are loans that are paid in a time/period
series-monthly, quarterly, or semi-annually.
The payment consists of principal plus the
interest. In making payments, the bank me
use either the straight line method the
scientific method.
 This is a method with fixed principle
payment every periodic payment. It is computed
by dividing the principal by the number of
periods. Added to the principal payment is the
interest payment which is computed based on the
outstanding balance.

● Example:
● On January 1, 2012, RCBC credited the account of
Phoenix corporation for the amount of P120,000.
The principal is payable in 4 equal quarterly
payments plus interest based on the outstanding
balance. I'm a more division table shows the
principle and interest payments. Assume that the
interest rate is 12% per annum and that the
payment starts on April 1.
SCIENTIFIC Thus, the total quarterly payment on the
METHOD principal and interest is P32,000.
This is a method in which the total payment
per period is equal. The principal payment is
obtained by deducting the interest from the
total payment.
COMPENSATING
BALANCE
- Compensating balance is the minimum
balance of the firm’s current or savings
account required by lending banks.
1. Activities related to the account holder’s account
2. Activities related to the bank credits
Amount to be borrowed= amount needed/(1-
c)
Example:
Gilmore corporation needs P250,000 to bridge
the gap in their working capital. Bonifacio Bank
is willing to give Gilmore a loan but requires a
compensating balance of 20%.
Though Gilmore corporation needs only P250,000
the support its working capital, The firm has to
borrow the entire amount of P312,500 to cover the
compensating balance required by Bonifacio Bank.
Thus, the compensating balance is equal to P62,500
(P312, 500×20%).
INTEREST RATES
- Interest rate is the amount charged to the
borrowing company for the use of funds of the
bank. Interest rates on short term loans vary
depending on the amount of the loan.
 METHODS OF INTEREST CHARGING
1. Add-on Interest - The interest is computed based on
the outstanding loan balance, and whatever interest
computed is added to the principal payment.
Example:
Assume a loan of P150,000 that has an add-on interest
of 12% for 90 days. Compute for the interest due and
the total payment required on the 90th day. Use 360
days in a year.
Interest = principal x rate x time
=P 150,000 x 0.12 x 90/360
=4, 500
On the maturity date, The total payment will be:
=Principal + interest
=P150,000 + P 4,500
=P 154,500
2. Discounted interest - the interest computed is
immediately deducted from the principal amount of
the loan. When pre-payment on interest is made, the
proceeds from the loan are reduced and the effective
interest rate is increased.
Example:
Assume a loan of P150,000 with a discount rate of
12% for 90 days. Compute for the interest and
discounted amount of the loan.
Interest = principal x rate x time
=P150,000 x 0.12 x 90/360
=P4,500
The discounted amount is:
=Principal – interest
=P150,000 - P4,500
=P145,500
 Cost of Commercial Bank Financing The effective rate is computed using the
following variables:
- The cost of commercial bank financing is Interest Amount – Is the value of interest paid by the
measured in term of the effective interest rate. This is borrower to the lender.
the actual rate charged by banks or other lending Interest Rate - The interest rate is the amount a lender
institutions on the borrower. charges for the use of assets expressed as a
percentage of the principal.
Days loan outstanding – is the days of a loan that is
unpaid, interest-bearing balance of a loan or loan
portfolio averaged over a period of time, usually
one month.
Method of interest charge – is a technique or process
use for determining the charge and how much a borrower
will pay.
Types of loan – is the borrower choices where they
could use.
 Effective Rate on Add-on Interest

Getting the effective rate with an add-on interest is the most basic computation in calculating loans and charging
interest. It is simple enough since a loan with an interest amounting to P15,000 per annum on a P150,000 loan for a year
will have an effective rate of 10%. However, this is only true if the loan is good for a year. What if the P15,000 interest
carries a 90-day loan? What will be its effective rate? In this case? Formula will be:

Effective rate = Interest x Days in a year

Principal Days loan in outstanding

= P15,000 x 360
P150,000 90

= 40%
 Effective Rate on Discount Interest

If the discounted loan is to be applied in getting the effective interest rate, the above formula will still be
used except that the interest is deducted immediately from the principal. Using the example, the effective
interest rate will be:

Effective rate = Interest x Days in a year

Principal-Interest x Days loan is outstanding

= P15,000 x 90
P150,000-P15,000 x 360

= 44.44%

It must be noted that the effective interest rate on a discounted loan is higher than that of the loan using an
add-on interest. The reason is that the principal, which is that principal, which is the base for computing the
rate, has a smaller amount.
 Effective Rate with Compensating Balance

As previously mentioned, the formula to compute for the loan to be borrowed is the amount needed/(1 –
C). The same concept will be applied in this case, except that the numerator this time is the interest rate.
Loans with a required compensating balance increases the effective rate of the loan.

Example:
Assume that a company id charged 9% on its loan for one year with a compensating balance of 15%.
What is the effective rate with the compensating balance?

Effective rate = Interest rate

(1 – C)

= 0.09
(1 – 0.15)

= 10.59%
Another way of computing for the effective rate with compensating balance is:

Effective rate = Interest x Days in a year

Principal - c Days loan is outstanding

Where c = compensating balance

Example:
Connelly Corporation is paying P100 interest for 120 days on a P1,000 loan with a compensating balance of 10%.
How much is the effective rate?

Answer:
Effective rate = P100 X 360
P1,000 – P100 120

= 33.33%
 Effective Rate on Installment Loan
As mentioned earlier, an installment loan is an obligation where principal payments are made in series. Financial
institutions normally charge interest on an add-on basis. To compute for the effective interest rate, the formula is:

= 2 x Annual no. of payments x Interest

(Total no. of payments + 1) x Principal

Example:
Concon borrowed P15,000 on a 12-month installment basis with total monthly payment applicable to interest and
principal. The interest rate charged by the lending institution is 12% per annum. Thus, the interest will be P1,800 for one year.
Since this is an add-on interest, then the total payment will have a face value of P16,800 for one year with a monthly payment
of P1,400 (P16,800/12). The interest has been computed in advance and added to the principal in order to arrive at the monthly
payment. The principal amount of loan could have been used for only a month but the interest computation is based on the
principal amount of loan and not on the diminishing balance. A P1,400 payment per month inclusive of interest and principal,
and without actually using the P15,000 for one year, gives an approximate outstanding loan balance of only P7,500. Thus, the
effective interest rate will be:

= 2 x 2 x P1,800
13 x P15,000

= 22.15%
 Banker’s Acceptance
- Banker’s acceptance are mainly used for transactions to finance the shipment and handling of merchandise between an
exporter and an importer.
- Banker’s acceptance are a type of short-term financing in a sense that they mature in less than a year, normally less than 180
days. This kind of security entails a small amount of risk because of the backing made by the importer’s bank.

Example:
Consider a Philippine company who wants to import goods amounting to P100,000 from an American company.The
Philippine company enters into a agreement with the American company to for the latter to grant credit for 90 days from the
shipment date. Once the credit is granted, the American company to be assured that it will be paid, asks the Philippine
company to apply for a letter of credit authorizing it to draw a 90-days draft from the importer’s bank. The Philippine
company, once it satisfied its own bank, say RCBC, regarding its credit standing, must sign a contract promising to pay the
amount of the draft plus any related fees. RCBC then issues the letter of credit addressed to the American company authorizing
it to draw a draft payable in 90 days amounting to P100,000.
With the assurance given by the bank to pay the American company, the exporter now ships the goods and draws the
draft from RCBC through its own bank, say US bank. The US bank now pays the American company, provided all the
conditions set forth in the letter of credit have been met. The draft is then forwarded to RCBC, the issuer of the letter of credit.
If all the conditions in the letter of credit are in order, RCBC in return writes is acceptance on the face of the draft. At this
stage, the draft becomes a banker’s acceptance and RCBC is now liable to pay US bank in the amount of P100,000. At the end
of the 90-days term, the Philippine company will pay RCBC in the amount P100.000 plus fees associated with the transactions.
 Commercial Finance Company Loans

- At times, when credit is unavailable from banks, a company in dire financial straits has to go to other
financing or lending institution. Because of the risky nature of the company, financing or lending institution
charge interest rate higher than those of commercial banks. Collaterals like account receivable, inventory,
or fixed assets are sometimes attached for security reason
 Commercial Papers

- A type of short-term financing, a commercial paper is issued with an unsecured promissory note. Only
companies possessing the highest credit ratings can issue commercial papers. Commercial papers are sold at a
discount in the form of short-term promissory notes and have a maturity date that varies from one to nine
months.

- Generally, commercial papers charge lowest interest rate than banks do. This is because only large and
financially stable firms can issue them.

- Commercial papers are also rated. The higher the credit rating, the lower the interest rate charged. Firms
and others financial institution normally see commercial papers as more profitable investment for their excess
cash rather than placing it in government treasury bills.

- Though issuing commercial papers give less borrowing costs to the issuer, this does not establish good
relationship between the borrower and lender because the transaction between the parties is purely impersonal.
Example:
Conan corporation, having a high credit rating, is given an opportunity to issue a commercial paper
worth P100,000 at 15% for 120 days. The funds obtained from the issuance will be needed for 90 days only.
The excess funds on hand can be invested in securities with a rate of return equivalent to 12%. The brokerage
fee of the marketable security transactions is 2%? What is the cost of issuing the commercial paper?

Answer:

Interest expense (P100,000 x 0.15 x 120/360) P5,000

Add: Brokerage fee (P100,000 x 0.2) 2,000
Total cost P7,000
Less: Return on marketable securities
(P100,000 x 0.12 x 30/360) 1,000
Net cost: P6,000
 RECEIVABLE FINANCING
During an economic slump where various markets suffer from the crunch, firms have
difficulty collecting receivables on credit sales on time. With minimal cash available to run their
operations, they resort to borrowing. Since banks also face the same situation, most often, they require
companies to offer collateral to back up the firm’s loan application. As an alternative, account receivable
may be offered as collateral.
Receivable financing allows the company an elbow room to raise money out of its
current receivables. The most common forms of receivable financing are:

1. Pledging of account receivables

2. Assignment of accounts receivable
3. Factoring of accounts receivable
4. Discounting of promissory notes
 Pledging of Accounts Receivable

Pledging of accounts receivable is a process of using receivables as loan collateral. This

pledging is done through a non-notification basis, which means that the firm’s customers are not informed
that their account or their obligation to the company is attached as collateral.
There is no transfer of ownership with regard to the accounts receivable pledged. The
collection of the pledged accounts receivable will still be conducted by the borrower and it does not free
the firm from its obligation to pay its debt on maturity date in case of non-collection of the receivables.
The loan value of the receivables depends on the credit rating of the company.
 Assignment of Accounts
Receivable
● Assignment of accounts receivable is a process in which the borrower (assignor) assigns the accounts
receivable to the creditor (assignee) as collateral the loan. Assignment is executed by signing a
security agreement transferring receivables to the creditor. It may be in the form of non-notification
or notification basis. Like pledging, the assignor retains ownership over the accounts receivable;
thus, the assignor pays the assignee in case the collections are not enough to cover the amount
loaned.
● The assignee advances cash to the assignor on a certain percent of the accounts receivable
assigned depending on the quality of the account. The assignor continues collecting the receivable
while the assignee charges the assignor the corresponding commissions, interest, and other service
fees related to the assignment.
 EXAMPLE:
ACD Company assigned P500,000 of its accounts receivable to RCBC under a notification
arrangement. RCBC loans 80% less 4% service charge and 3% commission on the gross amount assigned.
ACD signed a promissory note that provides for 12 % interest on the advances. The assignee made a
collection of P300,000. The final payment will take place after 6 months.
What is the amount to be received by the assignor?
Amount received by the assignor:
Advances (P500,000 x 0.80) P400,000
Less: Service charge (P500,000 x 0.04) P20,000
Commission (P500,000 x 0.03) 15,000 35,000

P365,000
 Factoring of Accounts Receivables
● Under this form of financing, there is an outright sale of accounts receivable to the bank of financing
company (called a factor). In a factoring arrangement, a company sells its accounts receivable on a
without recourse basis. Without recourse means the financing company assumes the full
responsibility of collecting the accounts receivable and in the event of non-collection, the financing
company can no longer collect from the seller company. Thus, the purchaser passes all the credit and
collection risks to the factor. Because of the nature of the transaction, the customers with factored
accounts are notified and required to pay directly to the factor. However, in some instances,
notification is not made so that the company avoids making a negative or poor impression on the
customers.
● The proceeds of the checks factored are equivalent to the face value of the check less the
necessary charges. With the relatively high credit risk of this type of financing, the cost, as compared
with other methods of receivable financing, is higher.
● When a firm enters into a factor arrangement, it binds itself into an agreement that runs for a
period of a year with an automatic provision for renewal. The arrangement is subject to cancellation
only if there is proper notification.
 Sarah General Merchandise factor its receivables amounting to P500,000 with 5%
commission to FLT Financing Corporation. An interest rate of 2.5% per month is charged on the 90% of
the accounts receivable advanced by the financing company. How much is the total cost of the factoring?

Answer:
Commission (P500,000 x 0.05) P25,000
Add: Interest expense (P500,000 x 0.90 x 0.025) 11,250
Total cost P36,250

It should be noted that the commission is computed based on the entire amount of the
receivables of P500,000 while the interest is charged on the cash advanced by the financing corporation
amounting to P450,000.
 Discount of Promissory Note
A promissory note is an unconditional promise in writing to pay on demand, or at a future
date, a definite sum of money. The note may specify a maturity date or indicate if the amount is payable
on demand. A promissory note is a negotiable financial paper; it can be sold to a bank or lending agency
at a specified discount rate. It is either interest-bearing or non-interest-bearing, the maturity value is the
same as the face value.

The important features of a promissory note are the following:

1. Face value. It is the amount of loan to be paid on maturity date.

2. Date of note. It refers to the date in which the note is written.
3. Maturity date. It specifies the date of payment as agreed by the borrower and lender.
4. Interest rate. It is the cost of borrowing.
5. Creditor. It indicates the one who accepts the promissory note and to whom payment will be made.
6. Debtor. It identifies the borrower who signs the promissory note.
 EXAMPLE
Heart Corporation has a note for P250,000 dated January 1, 2012. The note is due in 120 days
with interest at 9%. If Heart Corporation sells the note on March 31, 2012 to RCBC Capital charging a
discounted rate of 5%, how much is the net proceed of the promissory note?

Answer:
Maturity Value = Face value + Interest
= P250,000 + (P250,000 x 0.09 x 120/360)
= P250,000 + P7,500
= P257,500

Discount = P257,500 x 0.05 x 30/360

= P1,072.92

Net proceeds = Maturity value - Discount

= P257,500 – P1,072.92
= P256,427.08
 Inventory Financing

Inventory financing happens when a firm has nothing to offer as a

collateral for a loan. In general, Inventories comprise of raw materials, goods in
process, finished goods, and supplies.