Sources of Short-Term Capital Item Analysis Workshop, APPS

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 DISADVANTAGES Easier to obtain Often less costly Offers flexibility to the borrower 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.

#of day’s credit – Discount Period Formula Annual cost of not taking discount = Discount 1 - Discount X 360 days #of day’s credit – Discount Period

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