The financing horizons can be divided into three broad categories.

Short-term finance considers the immediate requirements of a company. It usually entails short-term credit for a period of less than one year. On the other hand, long-term loans seek to find a long-term solution to the financing requirements for a company. The long-term financing is generally for a period longer than five years, and some loans may extend up to thirty years. Other long-term financing – like common shares or preferred stock – can exist for a perpetual amount of time. Intermediate or medium-term financing is largely characterized by loans that range from a period of more than one year to less than five years. A company should choose the appropriate source of finance by considering its capital structure as well as the purpose for which the loan will be utilized. These funding requirements can be fulfilled by a range of instruments offered by a multitude of financial institutions. We will talk about the three categories of loans in the following sections. Short-term Financing Large and financially stable companies have the option to secure a line of credit from banks. A bank can offer either a committed or an uncommitted line of credit. Under an uncommitted line of credit, the bank may refuse to provide the credit facility if the circumstances change. On the other hand, the bank is required to provide the committed amount over the specified time period. The committed line of credit is viewed as a reliable source of finance, and the banks charge a fee for making the commitment. Companies with weaker credit rating usually have to pledge their assets as collateral in order to obtain the financing. Current assets such as inventory and receivable are commonly used as collateral for shortterm borrowings. The company can even factor its receivables in order to obtain liquid funds. Factoring involves the sale of receivables to a third party. The sale is usually carried out at a considerable discount to the face value of receivables, and the third party (factor) is responsible for subsequent collection of receivables. The companies do not necessarily have to rely on banks as a source of short-term financing. Large, credit-worthy companies can also issue commercial paper to raise funds. However, the commercial papers are usually issued through dealers, which is another type of financial intermediary. The interest costs on commercial paper are generally lower than the interest charged by bank (Lackman, Carlson and Varick, 2004), but the issuance costs can be significant for a small issue. Medium-term Financing The most common form of medium term financing is medium-term loan. Such loans are usually taken to meet the cash flows requirements of the company. Generally, the lender requires collateral against which the loan amount can be guaranteed. The lender also imposes certain covenants on the financial position of the company such as restriction on debt to equity ratio, working capital ratios, and dividend

payments. It is not unusual for a company to obtain loans in order to fund an asset purchase. The company also has alternate sources available to fund such asset purchases. Leasing is an alternate to the borrow-and-buy method of an asset purchase. Instead of buying the asset through an upfront payment, the company can use (but not own) the asset for period lease payments – that are similar to loan payments. The effective cost of leasing an equipment may be lower than the borrow-and-buy alternative, as the leasing companies may be able to realize economies of scale through bulk asset purchases and borrow at a lower rate due to better credit ratings (Plath & Nunnally, 1991 pp. 109-129). Long-term Financing Long-term financing is usually employed for more strategic decisions like business expansion or acquisition. Banks can offer longer-term loan, but they often charge high premiums and employ restrictive covenants. However, banks remain an attractive source of long-term financing in certain situations such as leveraged buyouts (Opler and Titman, 1993). Large companies with good credit ratings tend to issue long-term bonds in order to meet their long-term needs. The bonds can be issued with different maturities, and can be embedded with different options to suit the needs of the company. The bonds are usually issued through an investment bank that assists in the sale of the securities. The company can also issue equity or preferred shares to fund its long-term needs. The issue of such securities normally requires the assistance of an underwriter – an investment bank. Therefore, investment bank is an important financial institution concerning the long-term financing needs of large companies. In managing its financing needs, a company should focus on having sufficient funding for current as well as future needs, and should seek the most cost-effective source available given its needs, assets, and credit-worthiness. The company should have the flexibility to prepay the borrowing when cash permits, and arrange further financing when the need arises. The cash flows from the financing should be matched against the needs of the company. The company should have multiple options available to meet its financing needs. It is often attractive to pay a slightly higher rate in order to have flexible options. References Lackman, C, Carlson, W and Varick, C (2004) ‘Forecasting commercial paper rates’, Journal of Forecasting, 23(1), pp. 67–76 Opler, T and Titman, S (1993) ‘The Determinants of Leveraged Buyout Activity: Free Cash Flow vs. Financial Distress Costs’, The Journal of Finance, 48(5), pp. 1985-1999

Plath, A and Nunnally, B (1991) 'Effective Credit Costs in Retail Financial Markets: Leasing Versus Borrowing', Financial Services Review, 1 (2), pp. 109-129

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