Short Term Sources fir

Financing Current Assets

Group 4
Introduction

Short Term Financing

Refers to debt originally
scheduled for repayment
within one year.
It is often less expensive and
more flexible than longer-
term financing.
 Estimating Cost of Short-Term
Credit
A. Accruals – are current
liabilities for services received
but for which complete payments
have not been made as of the
reporting date.
Illustrative Problem:
XYZ Corporation is considering a
change in its payroll period, form biweekly to
bimonthly. The biweekly payroll is normally
P400,000. assuming wages accrue at a
constant rate, the average level of the
accrued wages account is currently
P200,000(P400,000/2). XYZ has an
opportunity cost of 12 percent.
 Formula:
Change in average accrued wages = Net
average accrued wages – current average
accrued wages
= -

= P200,000
Change in average accrued wages
= Net average accrued wages –
current average accrued wages

= (0.12) (P200,000)

= P24,000
B. Cost of Trade Credit
- Credit received during the discount period
is sometimes called free trade credit.

•Implicit/Hidden
Costs
•Opportunity Cost/
Missed Cash
Discount
C. Cost of Bank Loans
1.Simple Interest
- In a single interest loan, the borrower
receives the face value of the loan and
repays the principal and interest at
maturity date.
2. Discount Interest
- in discount interest loan, the bank
deducts the interest in advance or
discounts the loan
3. Add-on Interest
- Add-on interest is interet that is
calculated and added to funds
received to determine the face
amount of an installment loan.
4. Simple Interest with
compensating balance
- minimum account balance that a
lending bank requires the borrower
to maintain.
5. Discount interest with
compensating balance
Sources of Short Term Funds
Unsecured credit includes all those
sources that have as their security only
the lender’s faith in the ability of the
borrower t repay the fund when due.
Collateral is the asset that the borrower
pledges to a lender until a loan is paid.
Secured loans involve the pledge of
specific assets as collateral in the event
the borrower defaults in payment of
principal or interest.
Spontaneous source of short-term
financing are sources that arise
automatically from ordinary
business transaction.
Nonspontaneous negotiated or
short-term financing are sources
that require special effort or
negotiation. The major sources of
negotiated short-term credit are
bank loan, commercial paper and
accounts receivable/inventory loan.
ACCRUALS
the longer the period of time that the
firm holds these payments, the greater
the amount of financing they provide.
Trade Credit
provide one of the most flexible
sources of financing available to the
firm. It is also primary source of
spontaneous financing because it
arises from ordinary business
transactions.
 Short-term Bank Loans
Commercial banks are second in
importance to trade credit as a
source of short-term financing. Bank
provide nonspontaneous funds. As
a firm’s financing needs increase, it
requests additional funds from its
bank. If the request is denied, the
firm may be forced to abandon
attractive business opportunities.
When a bank loan is approved, the
agreement is executed by signing a
promissory note. The note specifies the:
1) amount borrowed,
2) percentage interested rate
3) repayment schedule any collateral
that might have to be put up as security
for the loan, and
4) any other terms and conditions to
which the bank and the borrower any
have agreed.
Line of Credit
- if the firm does not wish to borrow
until the working capital is actually
required, it may arrange credit
arrangement with a large
commercial bank.
Commercial Paper
- is an unsecured short-term(six
months or less) promissory note
sold in the money market by highly
credit-worthy firms.
Pledging or Assignment of
/accounts Receivable
- the borrower simply pledges or
assigns accounts receivalbe as
security for a loan obtained from
either a commercial bank or a
finance company.
Factoring Accounts
Receivable
- involves the outright sale of
the firm’s accounts receivable
to the finance company.
Inventory Financing
- a firm may also borrow against
inventory to acquire funds.
of the typical arrangements by
which inventory can be used to
secure short-term financing are:
1) Blanket inventory alien
2) Trust receipts/ chattel mortgage
agreement
3) Warehousing
Blanket Inventory lien
- this gives the lender a general lien
or claim against the inventory of the
borrower. The borrowing firm
maintains full control of the
inventories to sell and replace them
as it sees fit. This lack of physical
control over the collateral greatly
reduces the valued of this type of
security to the lender.
Trust Receipts- is an instrument
acknowledging that the borrower holds
the inventory and proceeds from sales
in trust for the lender.

Warehousing- under this arrangement

goods are physically identified,
segregated and stored under the
direction of an independent
warehousing company.