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Short Term Financing

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Short Term Financing

  1. 1. Short-term Financing
  2. 2. Presented by : FarhEen ( 074) Abrar ( 034 )Farzana ( 022 ) Anika ( 098 ) Risalat ( 158 ) Mehedi ( 111 )
  3. 3. What is Short-term Financing ?
  4. 4. Definition : Short term finance, often referred to as bridging finance, usually refers to loans mostly offered on terms of up to 12 months.
  5. 5. Types Of Short Term Financing : 1 2 3 4 Bank Over Draft Trade Credit Bank Loans Credit Cards
  6. 6. Why Do Firms Need Short Term Financing? Firms may prefer to borrow now for their inventory or other short term asset needs rather than wait until they have saved enough. Cash flow from operations may not be sufficient to keep up with growth – related financing needs.
  7. 7. Financing that rises and falls with the volume of sales activity during normal operations of the firm without further negotiation with creditors or lenders. Spontaneous Financing :
  8. 8. Types Of Spontaneous Financing : Accounts Payable (Trade Credit from Suppliers) Accrued Expenses.
  9. 9. Trade Credit : It is a source of short term business finance lent for a specific period of time to a business to pay for goods that they have received. Trade Credit cycle usually runs for a period of 28 days.
  10. 10. Examples Of Trade Credit : Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh Lorem ipsum dolor sit amet, consectetuer adipiscing elit, sed diam nonummy nibh Open Accounts Notes Payable Trade Acceptances The supplier ships required goods to the buyer who, after receiving and checking the related shipping documents, credits the supplier's account in their books with the invoice amount. A written promissory note that the buyer signs which evidences as a debt to the seller. The seller draws a draft on the buyer that orders the buyer to pay the draft at some future time period.
  11. 11. Terms Of The Sale : Cash on Delivery (COD): The buyer pays cash on delivery. Cash before Delivery (CBD): The buyer pays cash before delivery.
  12. 12. Net Period - No Cash Discount : When credit is extended, the seller specifies the period of time allowed for payment. For example - “Net 30” implies full payment in 30 days from the invoice date.
  13. 13. 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. For example - “2/10, net 30” implies full payment within 30 days from the invoice date less a 2% discount if paid within 10 days.
  14. 14. Seasonal Dating: Credit terms that encourage the buyer of seasonal products to take delivery before the peak sales period and to defer payment until after the peak sales period.
  15. 15. 01 Advantages of Trade Credit : Flexibility 03 Easy Availability Informality 1 2 3
  16. 16. Trade Credit as a Means of Financing What happens to accounts payable if a firm purchases $1,000/ day at “net 30”? $1,000 x 30 days = $30,000 account balance What happens to accounts payable if a firm purchases $1,500/day at “net 30”? $1,500 x 30 days = $45,000 account balance A $15,000 increase from operations
  17. 17. Cost To Forgo a Discount
  18. 18. Forgo, means “to abstain from, do without” Discount, means “a deduction from the usual cost of something, typically given for prompt or advance payment or to a special category of buyers”
  19. 19. Approximate annual interest cost = % discount (100% - % discount) X 365 days (payment date - discount period)
  20. 20. Stretching Account Payables Accounts payable is money owed by a business to its suppliers shown as a liability on a company's balance sheet. It is distinct from notes payable liabilities, which are debts created by formal legal instrument documents. Stretching Accounts Payable means postponing payment
  21. 21. What happens if we stretch account payables? Cash Discount if forgone Late payment as penalties or interest Deterioration in credit rating 1 2 3
  22. 22. Trade Credit an arrangement to buy goods or services on account without making immediate cash or cheque payments.
  23. 23. Bearers the cost of Trade Credit Suppliers – when they cannot impose on the buyers through higher prices of products/goods Buyers- when they are ready for higher prices Both- partial imposition on the buyers by sellers
  24. 24. There are three main indirect costs of trade credit as there is no direct cost involved: *loss of early payment discount *spoiling your relationship with your supplier if you do not adhere to the agreed trade credit terms *working capital cost if the net effect of receiving and providing trade credit puts your business in a negative working capital situation.
  25. 25. Advantages of trade Credit : 
 *an agreement can be very easy to organize *an agreement is relatively easy to maintain, as long as the conditions are met *can be used by most business, for supplies of goods or services *businesses are protected by late payment legislation *a potentially low-cost form of working capital finance.
  26. 26. Accrued Expenses *Amounts owed but not yet paid *Short Term Liability *Transactions to be recorded at the times of their occurrence Example- wages, taxes, dividends
  27. 27. Spontaneous Financing Financing which flows with the volume of sales activity during normal business operation that requires no additional assistance from lenders or creditors. The most common resources for this kind of financing include accounts payables and accruals.

  28. 28. Money Market Credit *Commercial Paper *Bankers’ Acceptances Spontaneous Financing
  29. 29. Unsecured Loans *Line of Credit *Revolving Credit Agreement *Transaction Loan Spontaneous Financing
  30. 30. What Is “Stand Alone” Commercial Paper ?
  31. 31. Definition Short-term, unsecured promissory notes, generally issued by large corporations
  32. 32. Commercial Paper Market is composed Of : Dealer Direct Placement Markets
  33. 33. Advantages : Cheaper than a short-term business loan from a commercial bank. Dealers require a line of credit to ensure that the commercial paper is paid off. 1 2
  34. 34. What is “Bank Supported” Commercial paper : A bank provides a letter of credit, for a fee, guaranteeing the investor that the company’s obligation will be paid.
  35. 35. Letter of credit (L/C) -- A promise from a third party (usually a bank) for payment in the event that certain conditions are met. It is frequently used to guarantee payment of an obligation.
  36. 36. Short Term Business Loans : Unsecured Loans Secured Loans
  37. 37. Unsecured Loans : A form of debt for money borrowed that is not backed by the pledge of specific assets. Secured Loans : A form of debt for money borrowed in which specific assets have been pledged to guarantee payment.
  38. 38. Unsecured Loans : Line of Credit (with a bank) -- An informal arrangement between a bank and its customer specifying the maximum amount of unsecured credit the bank will permit the firm to owe at any one time.
  39. 39. Unsecured Loans : Transaction Loan -- A loan agreement that meets the short-term funds needs of the firm for a single, specific purpose.
  40. 40. Calculate Interest Rate
  41. 41. Collect Basis Discount Basis Calculate Interest Rate compensating balance Commitment fees
  42. 42. Collect Basis interest at maturity of the note. Scenario: Loan=10,000 Interest=1000
  43. 43. Interest Useable Fund 1000 10000 10%%% ==
  44. 44. Discount Basis initial loan - interest Scenario: Loan=10,000 Interest=1000
  45. 45. Interest Useable Fund 1000 9000 11.11%%% ==
  46. 46. Compensating Balances Scenario: Loan =10,000 Interest =1000 Compensating Balance =1500
  47. 47. Interest Useable Fund 1000 8500 11.76%%% ==
  48. 48. Commitment Fees
 Fees on unused portion of loan Scenario: Loan(used+unused)=6000+4000=10000 Interest =10% Compensating Balance =5% of used loan Commitment rate =2%
  49. 49. Interest Useable Fund 600+4000*0.02 5970 11.39%%% ==
  50. 50. Security For Loan Asset as guaranty
  51. 51. Security For Loan Factors Marketability Life Riskiness 1 2 3
  52. 52. Accounts-Receivable-Backed Loans
  53. 53. Accounts-Receivable-Backed Loans • Non-notification • Notification

  54. 54. Inventory-Backed Loan
  55. 55. Types: Floating Lien Chattel Mortgage Trust Receipt Terminal Warehouse Receipt Field Warehouse Receipt 1 2 3 4 5
  56. 56. Factoring 
 Accounts Receivable Factoring -- The selling of receivables to a financial institution, the factor, usually “without recourse.”
  57. 57. Factoring Costs Composition of 
 Short-Term Financing * Cost of the financing method * Availability of funds * Timing * Flexibility *Degree to which the assets are encumbered
  58. 58. Conclusion
  59. 59. Any Question?
  60. 60. Thank You !