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CHAPTER 10

TERM FINANCING/FUNDING
SHORT
1. Short Term Funding Type
There are two types of short-term funding based on
the category of spontaneity towards the level of
company activity, namely:

1. Spontaneous financing: a type of funding that

changes automatically with changes in the level
of company activity (for example, seen from
company sales).
2. Non-spontaneous financing: a type of funding
that does not change automatically with
changes in the company's level of activity.
2. Spontaneous financing
2.1.1. Types of Spontaneous Funding
This type of funding follows the company's activities. There is
some examples of spontaneous types of funding: accounts
payable and accrual accounts. Accounts payable arises
because the company purchases supplies from suppliers
on credit.

2.2. Evaluate Cash Discount Offers

Cash deductions can be made by companies that
providing credit sales (creditors). The purpose of this
deduction is for debtors to pay off their debts more
quickly. Costs are borne by creditors. But if there is a
cash discount offer and the company (debtor) does
not take advantage of it, then there is a lost
opportunity cost.
The effective interest cost of the offer can be calculated
as follows (one year is assumed to be 360 days).
2 360
kd = - - - - - × ------ = 36.7% 98
20
The above calculation uses a simple interest rate
(does not include multiplication effects). If we want
to include the doubling effect, we can calculate it
as follows.
2
kd = ( 1 + ----- )360 / (30-10)– 1 = 43.86%
98
If the company doesn't take advantage of cash discounts, it can
reduce the cost of lost opportunities by extending
the payment period (stretching), by paying after
the maturity date. In some situations, such
stretching efforts may be possible. Suppliers will
allow such practices. But in other situations, such
stretching efforts will of course make suppliers
unhappy. Thus companies must pay attention to
the negative effects of such stretching.
3. Funding is not spontaneous
If sales increase, and the company wants to add
funds from the bank, the company will submit a
request for additional funds to the bank. Then the bank
will evaluate the application and determine whether
the application is accepted or not. Another alternative,
if the company wishes
issue securities, then the company must process
the issuance of these securities. This process
cannot be done automatically.
3.1. Commercial Paper (CP)
Large companies can issue CP instruments for
meet their financial needs. CP is a short-term debt
security (with a term of 30-90 days), without
collateral, issued by large companies and sold
directly to investors. Usually only large companies
can issue CP. These sales can be through financial
exchanges or directly to potential buyers
(investors). CP is an alternative to short-term debt
obtained through banks. CP instruments are sold
directly to investors, so the instruments do not
pass through financial intermediaries, for
example banks.
33.2. Credit Loans
3.2.1. Loan Type
Credit loans can come from banking institutions and
non-bank financial institutions.
There are two types of loans from banks:

1. Transaction credit, namely credit intended for

certain specific purposes.
2. Line of Credit. With this loan, the borrower can
borrow up to a certain maximum amount,
which is the ceiling (upper limit) of the loan.
3.2.2. Calculating the Effective Interest Rate on Credit
Loans
Interest or effective costs earned by the company will be
depending on several factors such as the loan interest
rate, minimum cash balance, and other fees. Suppose a
company takes a loan of IDR 10 million. The loan interest
rate is 20% per year. The company borrows for 3
months. One year is assumed to have 360 days. Interest
is calculated before tax. What is the effective interest
rate (TBE) that the company is paying?

Interest = IDR 10 million × (0.2 / 360) × 90 = Rp. 500,000

TBE = (1 + (500,000 / 10,000,000))360 / 90– 1 = 0.2155
or 21.55%
The effective interest rate paid is 21.55%, which is modest
higher than the nominal interest rate.
3.3. Factoring
3.3.1. Understanding Factoring
Factoring or factoring means selling receivables
From the perspective of companies that have
receivables, factoring has benefits because
companies do not need to wait until receivables are
due to obtain cash. The receivables side also benefits
because factoring is an investment alternative.
In factoring, there are three parties involved, namely:
1. The party who sells the receivables and needs cash,
this party is referred to as party 1
2. The party who owes the debt to party (1), namely party 2
3. The party who buys the receivables and gives cash
to party (1), namely party 3. This party is also called a
factor.
Factoring started from sale credit Which
resulting in accounts receivable. Companies that
have receivables (Party 1) need funds quickly to
fund operational activities. Party 1 can sell trade
receivables to a factor or factoring company (party
2). Party 2 gives cash to party 1. Now the
receivables belong to party 2. Party 3 collects the
receivables from party 2 and party 2 pays the
receivables to party 3.
Factoring eligibility is largely determined by reputation
the company in debt (party 3). Party 1's reputation
is relatively unimportant in this transaction. The
factor thus must evaluate party 3, whether party 3
has the ability to pay receivables or not. If not,
then the receivables are high risk receivables and
therefore not worth buying.
Specifically, factoring has benefits in terms of
party 1 as follows,
1. The company is free from managing receivables
administration problems. With factoring, the accounts
receivable ledger is usually held by the factor.
2. The company is free from the risk of bad debts. If the
sale of receivables is carried out without recourse,
then the risk that the receivables will be collected is
completely borne by the factor. The company will be
free from uncollected receivables.
3. Companies can obtain funds by guaranteeing receivables.
There is practically no real collateral (real goods) in this
receivable transaction.
4. The procedure is relatively simple and fast.
Simply by showing a sales invoice, the company
can get the funds it wants.
5. By offering trade debt to buyers/customers,
the company can offer competitive
alternatives in line with the buyer's domestic
competition.
6. If the company and factor have been in contact for a long time, sales
of receivables can be carried out continuously. The decision process
will be faster because it is only determined by the buyer's
reputation.

3.3.2. Who Needs Factoring?

Situations where factoring is used:
1. Companies can use factoring services to obtain
funds and strengthen their cash flow.
2. Sometimes business conditions worsen so that financial
ratios are not good.
3. Sometimes there are companies that are growing rapidly but
do not have a credit division.
4. The company is growing rapidly as in point (3) above, the need
for funds exceeds the existing funds. The company can sell its
receivables.
5. The loan process with factoring can take place
relatively quickly. This advantage is increasingly felt if
the company grows rapidly and the need for funds is
felt to be urgent.
In short, companies that need funding
Factoring is a company that is not served by a bank, either
because the company is not bankable (not worthy in the eyes of
the bank) or because it does not want to go to the bank.
3.3.3. Factoring Financing
Factoring costs usually consist of two types: costs
sales commission (factoring commission) and interest costs.
Commission fees are charged because the receivables
monitoring function is transferred to the factor. Factor maintains
the ledger of receivables sold, assumes the risk of receivables,
and also collects receivables.
Interest costs are calculated starting from the time the funds are given to
the company arrives at the time of payment of
receivables to the factor. In general, factoring
interest costs are usually higher than bank interest
costs (can be around 2% above the general interest
rate). This happens because factoring risk is higher
than bank credit risk.
In terms of factors, although the risk of factoring is quite high,
But factors have advantages that ordinary
companies don't have. First, the factor is usually a
financial institution (can be a banking or non-bank
financial institution). Such institutions usually have
better information about credit risks than ordinary
companies. Second, by holding a diversified
portfolio of accounts receivable, factors can reduce
unsystematic risk, namely risk associated with a
specific company.
3.4. Guaranteeing Receivables
With this alternative, ownership of the receivables is still in place
company hand. If the loan is not paid, the
receivables used as collateral can be used to pay off
the loan. Guarantee can be provided for all
receivables.
There are two costs associated with guaranteeing receivables:
(1) processing fees, and (2) interest fees.
3.5. Guaranteeing Merchandise (Inventory)
The procedures used will be the same as underwriting
receivables. The lender will evaluate the value of the
inventory, then will provide a loan at a certain
percentage of the inventory value
guaranteed. The company can guarantee all its
merchandise. Companies can also guarantee
certain supplies (merchandise). Lenders can invite
independent third parties, to ensure that
merchandise sales will be used to pay off the loan.

Total costs include two things: fees

processing/administration and interest fees.
3.6. Bank Acceptance
3.6.1. Bank Acceptance Creation Process
Acceptance is a statement of the accepting bank's ability to
make payment on a term note issued by the exporter, at the
maturity date of the note in question
Bank acceptance begins with a payment order to a bank
for a certain amount of money in some future period. Then, instead
of waiting for some future period, the company that has the warrant
can sell to another party at a discount. Companies can have money
faster. Meanwhile, the party who buys obtains interest income (the
difference between the nominal value and the selling price) from the
acceptance. Bank acceptance is a fairly popular way to fund export-
import transactions. Acceptance instruments usually have maturities
between 30 and 270 days with most being 90 days. The time period
can be negotiated to suit the time period for the goods to arrive.
3.6.2. Selling or Withholding Acceptance
For example, the draft asks for payment of IDR 1 million to the bank
The importer charges a commission fee of 1.5%,
the draft period is 60 days. If the exporter decides
to hold the acceptance until maturity, the exporter
will receive a discount of:

Face value IDR 1,000,000

Commission IDR 1 million - (0.015 x 60 / 360 x IDR 1 million) - IDR 2,500
---------------

Commission net value - - IDR 997,500

One year is assumed to be 360 days. Commission will
received by the bank is IDR 2,500. For example, the
interest for bank acceptance is 6%. If the exporter
decides to sell the acceptance, he will receive:

Commission net value Rp. 997,500

Interest (Rp. 1 million x (0.06 x 60/360)) - IDR 10,000
--------------

Net acceptance value - Rp. 987,500

At maturity, the importing bank will receive IDR 1 million

from the importer. Commission fees will be paid by the
exporter. Whether he will sell or retain the acceptance, the
exporter will compare the interest rate on the acceptance with
the interest rate in the financial market.
3.7. Repos
Repo or abbreviated as Rp, is an abbreviation of
repurchase agreement. For example, if a
securities dealer (seller) needs funds, he can sell
securities to investors accompanied by an
agreement that he will buy back the securities at
a certain time at a higher value than the purchase
value. This high value reflects the principal value
accompanied by loan interest. Securities that are
often used as collateral are SBI (in Indonesia) or
'T-Bills (in the United States).
Repo terms (repo terms) are the same as regular repo, only
the period is longer, namely more than 30 days.
Repo loans are seen as low-risk loans, because the
loans are guaranteed by securities issued by the
government.
Reverse repo is the opposite of repo. This is the dealer
looking for parties who have securities, then
buying the securities accompanied by a promise to
sell the securities in some future period at a higher
price. The higher price reflects the loan principal
plus loan interest.

If the term of the repo is short enough, letter

The value that is used as collateral may not need to
change hands physically (to the investor), because this
method is not practical.
4. Evaluate Short Term Funding Sources
Financial managers can evaluate with
using the framework: overall funding
strategy, costs, availability, and flexibility.
Funding Strategy. The financial manager can choose
aggressive, moderate, or conservative funding
strategies. Each will have different
consequences. With an active strategy, the
financial manager will use greater short-term
funding compared to long-term funding
(because the interest rate on short-term loans is
smaller than the interest rate on long-term
loans).
Cost. As explained in the previous section, managers
Finance needs to calculate funding costs which include
interest costs and other costs. The cost effective
(actually paid) cost that it should be
noticed by the financial manager. Besides explicit costs,
financial managers must also look at implicit costs, which
are difficult to quantify.
Availability. An alternative may provide
cheap and worth choosing. But if the company
cannot access these alternatives, then the
company cannot use them. For example, CP is
usually issued by large companies that already
have a name. Small companies thus cannot use
CP. Banker's Acceptance which is usually used for
export/import trade.
Flexibility. Manager finance in a way general
want flexibility, although do
loan. Spontaneous funding (accounts payable,
salaries payable) provides a spontaneous source of
funds, thus tends to increase flexibility. Bank debt
alternatives may reduce flexibility if banks impose
many conditions. Line of credit loans can provide
increased flexibility compared to transaction loans.