SHORT-TERM
FINANCING:SOURCES AND
COSTS
Prepared by: Danna Jean P. Latigay
Learning Objectives
1
2
3
Describe the factors
in selecting sources
of short-term
financing.
Identify the sources
of short-term
financing and
Determine the costs
of short -term
financing based on
sources.
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In the process of selecting the source of short-term financing,
the financial officer must consider two important factors:
SOURCES
COST OF SHORT-TERM
FINANCING
SHORT TERM
FINANCING
• Refers to a credit extend with a maturity
period of less than one year from the time
credit is granted.
Secured Credit
• means that the funds borrowed
are backed up by collateral in
which specific asset is pledged if
the amounts borrowed, including
related interests and penalty are
not settled.
Unsecured Credit
Refers to financing granted without a specific asset as collateral for the amount
borrowed. In most instances, the credit or financing is approved because of the
character of the borrower or debtor.
FACTORS IN
SELECTING THE
SOURCE OF SHORTTERM FINANCING
•
•
•
•
Availability of amount needed
Costs of Credit
Repayment Terms
Financing Requirements
Sources of Short-Term
Financing
Accruals of Expenses
costs that have been incurred by the business but are not
yet paid
For example:
Jenny Processing Company,
a heavily machine-driven
company, has incurred an
average electricity cost of P 2
million in September 2016
mainly due to production of
20 million units of products.
The extension on the
payment date of the P 2
million electricity cost is a
good source of funds for
other operating activities.
Supplier's
Trade Credit
Trade credit provides source of funds since
buyers are not required to make immediate
payment on the date of the purchase. The
amounts that are intended for paying for
purchases may be used to finance
other operating activities.
For example
YVONE Trading buys 4,000 units
of products every week at P 180
per unit for a total cost of P
720,000 a week ( 4,000 units x P
180). For a month, YVONE has
bought P 2,880,000 (P 720,000 x
4 weeks) worth of purchases. If
the suppliers have credit terms
of n/30, then YVONE will pay the
account on or before the 30th
day after the purchase. In this
case, YVONE will pay only P
720,000 though the total
purchase
amount
to
P
2,880,000.
Bank Loans
• Another primary source of
funds to support the
business
operation.
However, the processing a
loan application usually
requires
voluminous
documentary
papers,
including
the
financial
statements, detailed cash
flow
projection,
and
collateral that will serve as
the margin of safety in case
of default on repayments. It
is usually supported by a
promissory note.
Commercial Paper
• Sourcing of short-term
funds using a commercial
paper is usually made by
large companies that have
high or excellent credit
rating.
Pledging and Factoring
of Receivables
• Receivable is a result of credit
sales made by the business.
It is a good source of shortterm funds. In pledging, the
receivables are used as
collateral when borrowing.
On the other hand, factoring
involves
the
sale
of
receivable to the financing
company
Illustration:
ANGEL Company has a total receivable of P 500,000.
The company's funds are tied up to receivable and
inventory. Whenever ANGEL needs short-term funds,
the company can borrow from a financing company
and make the receivable as collateral.
COSTS OF SHORT-TERM FINANCING
1. Accruals of
Expenses
2. Supplier's
trade credit
4. Commercial
papers
3. Bank loans
5. Pledging
and factoring
of receivables