Sourcesof Shorth Funds

7/28/2019 Sourcesof Shorth Funds

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Chapter

Chapter

Sources of Short-TermFinancing

Sources of Short-TermFinancing


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Chapter 8 - Outline

Sources of Short-Term Financing

Trade Credit from Suppliers

Net Credit Position

Chartered Banks in Canada

Types of Short-term Loans Interest Rate Terminology

Corporate and Foreign Borrowing

Accounts Receivable Financing

Inventory Financing

Summary and Conclusions

PPT 8-2


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Sources of Short-Term Financing

There are various sources of short-term funds

available to a firm:


Bank Loans

Corporate Promissory Notes

Bankers Acceptances

Foreign Borrowing

Loans Against Receivables and Inventory

PPT 8-3


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Figure 8-1

Structure of corporate debt, 2000

PPT 8-4


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The largest source of short-term financing for a

firm-over 50% It is usually a 30-60 day grace period before a bill is

due

A cash discount is often given if payment is madewithin a specified time

Ex., 2/10 net 30 means a 2% discount is given if paid

in 10 days; if not, the full amount is due in 30 days

PPT 8-5


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Types of Short-term Bank Loans

Line of Credit: company is able to draw upon a yearly borrowing facility

arranged in advance revolving credits are for periods longer than 1 year

general purpose loans

Transaction Loan: short-term loan for a specific purpose

Compensating Balance: when a bank requires a minimum average account balance in

order to qualify for a loan

can be thought of as a form of collateral

less common than in the past

PPT 8-8


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Chartered Banks in Canada

http://www.rbc.com/

http://www.cibc.com/index.htmlhttp://www.bmo.com/

http://www.scotiabank.com/

http://www.tdbank.ca/index.html

http://www.nbc.ca

PPT 8-7
http://www.rbc.com/http://www.cibc.com/index.htmlhttp://www.bmo.com/http://www.scotiabank.com/http://www.tdbank.ca/tdbankhttp://www.nbc.ca/http://www.nbc.ca/http://www.tdbank.ca/tdbankhttp://www.scotiabank.com/http://www.bmo.com/http://www.cibc.com/index.htmlhttp://www.rbc.com/


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Compensating Balance:

when a bank requires a minimum average accountbalance in order to qualify for a loan

can be thought of as a form of collateral and

compensate the bank for its service

Compensating balances raise the cost of a loan, the

borrower must borrow more than the amountneeded

Amount borrowed = amount needed/ (1-C)

less common than in the past


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Interest Rate TerminologyPrime Rate:

the interest rate charged to a banks best customers acts as a benchmark for calculating other interest

rates

Effective Interest Rate:

the actual interest rate or true cost of a loan,including interest on interest (compounding)

PPT 8-9


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Figure 8-2

Prime interest rate movements

PPT 8-10


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Corporate and Foreign BorrowingCommercial Paper:

a short-term unsecured promissory note in minimum units of $50,000

sold (at a discount) by finance companies, other large corporations

cheaper than bank loans

total amount of commercial paper outstanding has increased greatly

in recent yearsBankers Acceptances

to finance goods in transit (particularly imports)

sold at a discountEurodollar Loans:

loans from foreign banks are called Eurodollar loans

(U.S Eurodollars predominate)

foreign interest rates may be lower

PPT 8-11


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Figure 8-3

Corporate short-term paper outstanding

PPT 8-12


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Figure 8-4

Comparison of commercial paper rate to

bank prime rate*

PPT 8-13


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Accounts Receivable Financing

A/R financing includes 3 choices:

pledging accounts receivable as collateral for a loan

an outright sale (factoring) of receivables to a

factoring company

Asset-backed Securities: sale of receivables by large

corporations in public offerings

Tends to be a relatively expensive source of financing

PPT 8-14


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Pledging accounts of receivable as

collateral Convenient means of financing. Receivables levels are rising

as the need for financing is increasing.

Lender screens accounts and loans a percentage (60% -

75%) of the acceptable amount.

Lender has full recourse against borrower.

The interest rate, which is usually in excess of the prime rate,

is based on the frequently changing loan balance

outstanding.


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Factoring Receivables

Receivables are sold, usually without recourse, to a factoring

firm.

A factor provides a credit-screening function by accepting or

rejecting accounts.

Factoring costs.

Commission of 1%-3% of factored invoices

Interest on advances


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Asset-backed public offerings

Public offerings of securities backed by receivables as

collateral is a recently employed means of short-termfinancing. These have included mortgages, car loans and

credit car receivables. Credit ratings often are better than

the issuing firm.

Several problems must be resolved:

Image: Historically, firms that sold receivables wereconsidered to be in financial trouble.

Computer upgrading to service securities.

Probability of losses on default of underlying securities.


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Inventory Financing

Inventory may be assigned as collateral security

against an operating loan.

The collateral value of inventory is based on several

factors.

Marketability Raw materials and finished goods are more

marketable than goods-in-process inventories.

Standardized products or widely traded commoditiesqualify for higher percentage loans.

Price Stability

Perishability

Ph sical control

LT 8-8


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Inventory control method

Blanket inventory liens: Lender has general claim against

inventory of borrower. No physical control.

Trust receipts: Also known as floor planning; the borrower

holds specifically identified inventory and proceeds from salein trust for the lender.

Warehouse: Goods are physically identified, segregated, andstored under the director of an independent warehousing

company. Inventory is released from warehouse openly upon

presentation of the warehouse receipt controlled by thelender.


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Longer-term Loans

Term Loan (Instalment Loan):

loan for 1-7 years interest rate may be fixed or change with prime rate

repaid in monthly or quarterly instalments

used to buy capital assets (ex; automobiles, property)

LT 8-9

PPT 8 16


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Summary and Conclusions

Short-term financing options

include:

trade credit from suppliersbank operating loans

commercial paper for large

companies

Eurodollar or foreign currency

loans

financing secured by accounts

receivable or inventoryBank operating loans move up or

down based upon the borrowers

need for working capital, and incur

interest based upon the prime rate

PPT 8-16

Sourcesof Shorth Funds

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