Copyright ©2003 South-Western/Thomson Learning

Chapter 18Short- and Intermediate-Term

Funding Alternatives

Introduction

• This chapter discusses short-term credit sources and intermediate-term sources of funding available to a company.

• These spontaneous short-term sources include trade credit, accrued expenses and deferred income. Negotiated sources are bank credit, commercial paper, receivables loans, and inventory loans.

• The primary sources of intermediate-term funding loans and leasing (chapter 19).

Sources of Short-Term Financing

• Trade credit

• Accruals and deferred income– Legal and practical considerations

• Loans from commercial banks

• Commercial paper

• Collateral for S-T loans– A/R– Inventory

Cost of S-T Credit

AFC = Interest + Fees

Usable funds 365

Maturity (Days)

Simple interest

Compounded interest

m

[ Interest + fees

Usable funds ] – 1 1 + APR =

Trade Credit (T/C)

• Extended on open account as A/P• Spontaneous source of financing• Cost of T/C is contained in the purchase

price• Lost discounts T/C is never free

AFC = % discount

100% – % discount

365

Credit – Disc period

Commercial Bank Loans

• Single loans for specific financial needs• Line of credit

–Agreement to borrow up to predetermined limit at any time

• Revolving credit–Legally commits the bank–Usually secured–Requires a commitment fee

AFC =

Interestcosts

Usable funds

+Commitment

fee 365

Maturity ( days )

Commercial Paper

• S-T unsecured promissory notes

• Issued by large well-known corporations

• Maturities from a few days to 9 months

• Sold at a discount• Purchasers

Individuals • Corporations • Banks • Insurance companies Pension funds • Money market funds

Maturity ( days )

Interest costs +

Placement fee

Usable funds 365

AFC =

A/R as Collateral

• Fairly liquid

• Easy to handle

• Subject to fraud

• High administrative costs

• Two common forms– Pledging–Firm retains title– Factoring–Sale of A/R

• http://www.factoring.org/

Information on Factoring

• Do a search at this Web site for “factoring accounts receivable”:http://www.google.com/

• Investigate factoring at this Web site:http://www.21stcapital.com/

Financing From Foreign A/R

• Insured by the Export-Import Bank

• Contracts guaranteed by – Foreign bank– Government

• Trading companies

Inventory as Collateral

• Stability

• Characteristics

– Perishability

– Identifiability

– Marketability

– Price stability

Inventory as Collateral Continued

• Possession of the collateral

– Floating lien

– Trust receipt

– Terminal warehouse

– Field warehouse

Term Loan

• Maturity

• Sources

• Less expensive

• Better suited

• Working capital

• Default provisions

• Amortization

• Interest costs

• Loan agreements

• Warrants

• Security provisions

• Covenants

Sources of Term Loans

• Banks

• Insurance companies

• Pension funds

• Government agencies

• Equipment suppliers

– Conditional sales contracts

– Chattel mortgages

Government Agencies

• SBA

– http://www.sba.gov/

• Participation loans

• SBICs

• IDAs

– Municipal bonds

Security Provisions

• Dependent on the borrower’s credit standing

• Provisions– Assignment of payments due from a

particular contract– Assignment or pledging of inventories,

A/R or securities– Floating lean– Mortgage– Life insurance– Pledge of marketable securities

Covenants

• Affirmative

• Negative

• Restrictive