Sources of Short Term External Financing (Working Capital)

• Trade credit

• Commercial banks

• Finance companies

• Factors

• Leasing companies

Trade Credit

• Trade credit—the ability to buy goods and services and have 30, 60, or 90 days to pay for them– Major source of short-term funds for small

businesses– Represents 30 to 40 percent of the current

liabilities of non-financial companies, with generally higher percentages in smaller companies

Commercial Banks

• Commercial Banks

Common types of financing involving the use of a bank– Line of credit loans– Time-sales finance– Term loans– Chattel mortgages and equipment loans– Conditional sales contracts– Plant improvement loans

Commercial Finance Companies

• Financing Companies– Frequently lend money to companies that do not

have positive cash flow– Will not make loans to companies unless they

consider them viable risks; usually more accepting of risk than are banks

Factoring

• Factoring—a form of accounts receivable financing where the receivables are sold, at a discounted value, to a factor– The factor buys the client’s receivables outright,

without recourse, as soon as the client creates them, by shipment of goods to customers

– Cash is made available to the client as soon as proof is provided (old-line factoring) or on the average due date of the invoices (maturity factoring)

Leasing Companies

• Leasing companies—leases common and readily resalable items such as automobiles, trucks, typewriters, and office furniture to both new and existing businesses– Up front payment required of about 160 percent of

the value of the item being leased– Interest may be more or less than other forms of

financing, depending on the equipment leased, the credit of the lessee, and the time of year

What to Look for in a Bank

What to Look for in a Bank

• Knowledge

• Sense of urgency

• Teaching talent

• Industry knowledge

• Financial stability

• Manager with backbone

The TLC of a Banker or Other Lender

Key issues in managing a banking relationship:

• Your banker is your partner, not a difficult minority shareholder

• Be honest and straightforward in sharing information

• Invite the banker to see your business in operation

The TLC of a Banker or Other Lender

• Always avoid overdrafts, late payments, and late financial statements

• Answer questions frankly and honestly.

• Understand the business of banking

• Have an “Ace in the Hole”