21-11-2012, 01:36 PM
Short-Term Financing
1Short-Term Financing.pptx (Size: 231.54 KB / Downloads: 34)
Objectives:
Understand the sources and types of spontaneous financing.
Calculate the annual cost of trade credit when trade discounts are forgone.
Explain what is meant by "stretching payables" and understand its potential drawbacks.
Describe various types of negotiated (or external) short-term borrowing.
Calculate the effective annual interest rate on short-term borrowing with or without a compensating balance requirement and/or a commitment fee.
Understand what is meant by factoring accounts receivable.
Short-Term Financing
Spontaneous Financing
Negotiated Financing
Factoring Accounts Receivable
Composition of Short-Term Financing
Terms of the Sale
Net Period - Cash Discount-- when credit is extended, the seller specifies the period of time allowed for payment and offers a cash discount if paid in the early part of the period. “2/10, net 30” implies full payment within 30 days from the invoice date less a 2% discount if paid within 10 days.
Who Bears the Cost of Funds for Trade Credit?
Suppliers -- when trade costs cannot be passed on to buyers because of price competition and demand.
Buyers -- when costs can be fully passed on through higher prices to the buyer by the seller.
Both -- when costs can partially be passed on to buyers by sellers.
Unsecured Loans
One-year limit that is reviewed prior to renewal to determine if conditions necessitate a change.
Credit line is based on the bank’s assessment of the creditworthiness and credit needs of the firm.
“Cleanup” provision requires the firm to owe the bank nothing for a period of time.
Factoring Accounts Receivable
Factor receives a commission on the face value of the receivables (typically <1% but as much as 3%).
Cash payment is usually made on the actual or average due date of the receivables.
If the factor advances money to the firm, then the firm must pay interest on the advance.
Total cost of factoring is composed of a factoring fee plus an interest charge on any cash advance.
Although expensive, it provides the firm with substantial flexibility.