6. Sources of Short-term financing.ppt - 6 Short-term Financing(Current liability Management 1 2 3 Sources of short-term credit include accruals

6. Sources of Short-term financing.ppt - 6 Short-term...

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Short-term Financing 1 6. Short-term Financing (Current liability Management) 1. Sources of short-term credit include accruals, accounts payable (trade credit) , notes payable (negotiated sources of financing), bank loans and commercial paper. 2. Any liability originally scheduled for repayment within one year 3. Usually for businesses to run their day-to-day operations including payment of wages to employees , inventory ordering and supplies.
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Short-term Financing 2 Classification 1. Unsecured sources are obtained without the borrower’s pledge of specific assets as collateral . Major sources of unsecured short-term credit include accrued wages and taxes, trade credit, unsecured bank loans, and commercial paper. 2. Secured sources involve the pledge of specific assets as collateral in the event the borrower defaults in payment of principal or interest. Commercial banks, finance companies and factors are the primary suppliers of secured credit. The principal sources of collateral include accounts receivable and inventories.
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Short-term Financing 3 Accruals 1. Continually recurring short-term liabilities. 2. Increase automatically or spontaneously with operation. 3. As a firm’s sales increase, accounts payable and accruals increase in response to the increased purchases, wages and taxes. 4. This type of debt is “free” in the sense that no interest is paid on funds raised through accruals.
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Short-term Financing 4 Accounts Payable (Trade Credit) 1. Trade credit is a spontaneous source of financing that arise from ordinary credit purchases. 2. It is the largest source of short-term financing for a firm
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Short-term Financing 5 Accounts Payable (Trade Credit) 3. It is usually a 30-60 day grace period before a bill is due. 4. Suppliers often offer discounts if the credit purchase is paid within a stated discount period. Example: 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. In this case, the true price is the net price, or 98% x list price because any customer can purchase an item at a 2% discount as along as the customer pays within 10 days. If the customer wants an additional 20 days of credit beyond the 10-day discount period, he must incur a finance charge of 2% for that credit.
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Short-term Financing 6 Trade Credit 1. To arrange for credit, the firm need only place an order with one of its suppliers. 2. The supplier checks the firm’s credit and if it is good, send the merchandise. 3. The purchasing firm pays for the goods in accordance with the supplier’s credit terms.
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Short-term Financing 7 Components of Trade Credit 1. Free trade credit : credit received through the discount period 2. Costly trade credit : credit in excess of free trade credit and its cost is based on the discount rate. This is the cost the purchaser must bear in exchange of the benefit of paying over time (i.e., this is the finance charge incurred for differing the payment past a pre-specified discount period)
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Short-term Financing 8 Analyzing Credit Terms 1.
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