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FLOW OF PRESENTATION
INTRODUCTION
FINANCING
STRATEGIES SHORT-TERM CREDIT ADVANTAGES AND DISADVANTAGES OF SHORT-TERM FINANCING SOURCES OF SHORT-TERM FINANCING FACTORS IN SELECTING SOURCE OF SHORT-TERM FUNDS
FLOW OF PRESENTATION
UNSECURED
COMMERCIAL PAPER
FLOW OF PRESENTATION
SECURED
SOURCES OF SHORT-TERM
LOANS
ACCOUNTS RECEIVABLE FINANCING PLEDGING/ASSIGNMENT FACTORING INVENTORY FINANCING BLANKET (FLOATING) INVENTORY LIEN TRUST RECEIPTS LOAN AND CHATTEL MORTGAGE WAREHOUSING RECEIPT LOANS
INTRODUCTION
One of the most important decisions that must be made with respect to working capital management is how short-term credits will be used to finance working capital.
FINANCING STRATEGIES
Financing strategies of the company usually depends on the financing needs of the company.
FINANCING STRATEGIES
Alternative Short-Term Financing Strategies/Policies
1. Aggressive Financing Strategy/Policy 2. Conservative Financing Strategy/Policy
Strategy/Policy
SHORT-TERM CREDIT
Also called short-term/current liability, this is any debt scheduled to mature within one year or one operating period.
The effective cost of credit. 2. The availability of credit. 3. The influence of the use of a particular credit source on the cost and availability of other sources of financing. 4. Any additional covenants or restrictions.
SPONTANEOUS SOURCES
These are short-term credits arising from the normal course of business. There are no interest costs attached to these sources. However, they may have some implicit costs.
Without Discount
With Discount
Dating
1. Taking the cash discount. 2. Payment at the last day of credit terms. 3. Stretching accounts payable.
These are company liabilities for services that have been provided for the company but are not yet paid.
dates are set, usually 10-15 days after close of each month.
NEGOTIATED SOURCES
These are short-term credits arising from the negotiation entered into by the borrowing firm and the potential creditors, usually banks and other corporations, evidenced by a formal note or some other documents.
These are short-term business credit provided by commercial banks, requiring the borrower to sign a promissory note to acknowledge the amount of debt. Types of Short-Term, Unsecured Bank Loans:
1. Single-Payment Notes
2. Lines of Credit 3. Revolving Credit Agreements
SINGLE-PAYMENT NOTE
This is a short-term, one-time loan made to a borrower who needs funds for a specific purpose for a short period.
Resulting instrument: A Note stating the terms of the loan, including the maturity period of the loan and the interest rate, usually stated on a per annum basis.
LINE OF CREDIT
This is an informal agreement between a bank and a borrower-company specifying the maximum amount of unsecured short-term borrowing the bank will make available to the firm over a period of time, usually one (1) year and subject to one (1) year renewals.
LINE OF CREDIT
Some Restrictions/Conditions:
Operating-Change Restrictions contractual
restrictions that a bank may impose on a firms financial condition or operations as part of the agreement Compensating Balances a required account balance equal to a certain percentage of the amount borrowed from the bank under the same agreement.
LINE OF CREDIT
Some Restrictions/Conditions:
Annual Cleanup the requirement that for a
certain number of days or months during the year, borrowers under a line of credit carry a zero-loan balance.
Interest Rate on this type of agreement is usually stated as a floating rate the prime rate plus a premium.
This is a formal, legal commitment by the bank to extend credit up to a stated maximum amount for a given period of time. Due to the features of this type of loan, the bank usually charges commitment fee on an amount unused by the borrower.
EXPLICIT COST: Effective Interest on the Loan, plus add-ons (Premium, Compensating Balances, etc.)
Discount Interest:
OR
OR
COMMERCIAL PAPER
This is an unsecured short-term promissory note issued by large, strong credit rating companies to other companies and institutions, such as trust funds, banks and insurance companies. Commercial papers can be obtained through the money market (a type of financial market for trading of short-term securities).
ADVANTAGES: Less costly than trade credit and bank loans. Not subject to possible restrictive covenants contained in most bank loans.
DISADVANTAGES: Commercial papers have fixed maturity rate, exposing it to liquidity risk (the risk of non-conversion of the security into cash at maturity). Commercial papers have limited access and user availability.
Computation:
These are short-term loans that use some specific assets as collateral in securing the loan.
receivables used as collateral; 2. Adjustment of receivable value for allowances, usually on a fixed percentage; 3. Determination of loan amount.
continues to collect from the customers the amount of the receivable and remits the same to the lender. In a notification basis, the borrower notifies the customers to remit their payment directly to the lender.
Advantage:
as collateral
Disadvantage
Relative higher cost compared with other
Computation:
receivables used as collateral; 2. Determination of loan amount, considering retention of certain amount for any allowances and returns.
Factoring of accounts receivable are usually done on a notification basis and are oftentimes made on a nonrecourse, thus substantial transfer of risks and returns of ownership to the receivable is made.
Computation:
INVENTORY FINANCING
Inventories are goods or items which are held for sale in the ordinary course of business, or those which are in the process of production for such sale, or those materials or supplies that are to be consumed in the production process or in the rendering of services. They also encompass those goods purchased and are held for resale by the company.
INVENTORY FINANCING
Because of the marketability of inventories and their market value being usually higher than the book value, inventories are also desirable forms of collateral for loans. However, not all types of inventories may be used as collateral. The best inventory items to be pledged as collateral for loans are those that are highly marketable and generic in nature.
INVENTORY FINANCING
Under the trust receipt loan and chattel mortgage, certain inventory items are specifically identified and are used as collateral for loan. Oftentimes, these inventory items are identified via serial numbers. The items used as collateral are still being held by the borrower.
Computation:
REFERENCES:
BOOKS: Cabrera, Ma. Elenita, FINANCIAL MAANGEMENT, PART I, 2012 Edition, Conanan Educational Supply, Manila E-BOOKS: Gitman, Lawrence J., PRINCIPLES OF MANAGERIAL FINANCE, 10th Edition Brigham, Eugene F. and Houston, Joel F., FUNDAMENTALS OF FINANCIAL MANAGEMENT, 10th Edition Van Horne, James C., FINANCIAL MANAGEMENT AND POLICY, 12th Edition