Sources of Short-Term Capital

What is short-term financing?

Short-term financing deals with the demand for and supply of short-term funds which may either be secured or unsecured

ADVANTAGES Easier to obtain Often less costly Offers flexibility to

the borrower

DISADVANTAGES Mature more

frequently At times, may be

more costly than long-term debts

Cost of Credit

Firms which extend trade credit normally provide incentive to firms which settle their accounts early. The incentive takes the form of a discount if settled within specified number of days.

Formula

Annual cost of not taking discount

360 days

#of day’s credit – Discount Period

Discount

1 - DiscountX=

Sample Computation

A sales on account bears the following terms: 2/10, n/30.

Suppliers of Short-Term Funds

Trade Creditors Trade Credit Instruments

Open-book credit Trade acceptance Promissory note

Open Book Credit

An unsecured credit instrument that permits the customer to pay goods delivered to him in a specified number of days.

 A credit system in which merchandise may be received based only on the promise of payment. (thelawdictionary.org)

Trade Acceptance Time draft drawn by a seller upon a purchaser,

payable to the seller as payee, and accepted by the purchaser as evidence that the goods shipped are satisfactory and that the price is due and payable.

Bill of exchange that is accepted (signed) only by the drawee (party on whom it is drawn, usually a buyer or importer), and is not countersigned by the drawee’s bank. Such bills are only as good as the drawee's creditworthiness. (businessdictionary.com)

Promissory Note An unconditional promise in writing made by

one person to another, signed by the maker, engaging to pay on demand or at a fixed or determinable future time, a sum certain in money to, or to the order of, a specified person, or to bearer.

A promissory note typically contains all the terms pertaining to the indebtedness by the issuer or maker to the note's payee, such as the amount, interest rate, maturity date, date and place of issuance, and issuer's signature.(investopedia.com)

Suppliers of Short-Term Funds

Commercial Banks Types of Short-Term Loans

Unsecured Loans Secured Loans

Suppliers of Short-Term Funds

Commercial Paper Houses Finance Companies

Major types of finance companies Sales finance companies Business/commercial finance companies Personal finance companies

Suppliers of Short-Term Funds

Factors Insurance Companies Company Accruals