Published on December 8, 2016
1. Short Term Financing
2. What is Financing ?? Financing is defined as a means of obtaining the resources to purchase an item, then paying back the loan in a set time period for a set monthly, weekly, yearly.
3. What is short term financing?? • Arranging of available External funds to meet the needs of a firm for a year or less time.
4. Why Do Firms Need Short-term Financing ? • Cash flow from operations may not be sufficient to keep up with growth- related financing needs • Firms may prefer to borrow now for their inventory or other short term asset needs rather than wait until they have saved enough. • Firms may prefer short-term financing instead of long-term sources of financing.
5. Spontaneous Sources • Trade Credit • Bank financing.
6. Trade Credit • It is a credit that a customer gets from supplier of goods. • It is the spontaneous source o financing. • In this buying system firm don’t pay immediately. • Deferral of payments is a short- term financing called “Trade Credit.”
7. Types ofTrade Credit •Open Account •Notes payable
8. Types ofTrade Credit • Open Account- An open account transaction in international trade is a sale where the goods are shipped and delivered before payment is due, which is typically in 30, 60 or 90 days. Obviously, this option is advantageous to the importer in terms of cash flow and cost, but it is consequently a risky option for an exporter.
9. Types ofTrade Credit • Notes payable :A note payable is a written promissory note. Under this agreement, a borrower obtains a specific amount of money from a lender and promises to pay it back with interest over a predetermined time period.
10. Pros and Cons • Benefits- 1- Easy availability 2- Flexibility 3 – Informality • Costs- 1- typically receive a discount, if you pay early. 2- the cost is in the form of the lost discount, if you don’t take it.
11. Cost ofTrade Credit None 1. cost of Forgoing Cash Discount 2. Penalty Charge for late Payment Cost passed on to Buyer by Seller for: 1. Carrying Costs. 2. Credit Checking 3. Bad-Debt Losses Cost of Paying late Prompt Payment Delayed Payment Visible cost Hidden Costs
12. Bank Financing/ShortTerm Bank Loan • Banking refers to that process in which a bank which is a commercial or government institution offers financial services that include lending money, collection of deposits, issue of currencies and debit cards, and transaction processing etc.
13. Types of Short term Financing • Single Loans • Line of Credit • Revolving Credit Agreement- 1. Used loan = Interest 2. Unused loan= Commitment fee
14. Bank financing • Bank overdraft • Cash credit • Purchase and discounting of bills • Short term loan • Letter of credit