1. Sources of Short-Term Capital
By: Mrs. Belen Apostol

2. Sources of Short-term Capital
The total business finance function is composed of three segments:
Short-term financing
Intermediate-term financing
Long-term financing
Short-term financing – deals with the demand for supply of short-term funds which may either be secured or unsecured.

3. Advantages of Short-term Credits
They are easier to obtain – the risk involved in lending funds varies according to the length of payment period.
e.g. long-term credits are more risky than short-term credits from the creditors point of view.
2. Short-term financing is less costly – short-term credit is often granted by creditors at less cost
3. Short-term financing offers flexibility to the borrower – the debtor may use other sources of credit after the short-term credit is settled.

4. Disadvantages of Short-term Credits
Short-term credits mature more frequently – firms with slow moving inventories like manufacturing capital goods worry about short-term creditors more often.
Short-term debt may at times, be more costly than long-term debts-risk, collateral, general economic outlook and size of the loan are taken into consideration. Short-term credit may prove to be more costly.

5. The Suppliers of Short-term Funds
Trade creditors
Commercial banks
Commercial paper houses
Finance companies
Factors
Insurance companies
Company accruals

6. Trade Creditors
Trade creditors – credit extended by suppliers to buyers for use in manufacturing, processing, or reselling goods for profit. (from firm to another firm) - usually unsecured - also known as trade credit, commercial credit, mercantile credit or accounts receivable credit. - appears as accounts receivable/ notes receivable in the books of the creditors, and as accounts payable or notes payable in the books of the debtor.

7. Trade Creditors
Consumer credit – credit extended to a final consumer. Installment credit – credit extended to a firm in the purchase of machinery and equipment and secured by the equipment sold.

8. Trade Credit Instruments
Open-book credit – constitutes a bulk of trade credit, unsecured and permits payment for goods delivered in a specified number of days.
- source of inventory financing
2. Trade Acceptance – a time draft drawn by a seller to a purchaser, payable to the seller as payee, and accepted by the purchaser as evidence that goods shipped are satisfactory and that the price is due and payable.

9. Trade Credit Instruments
3. Promissory Note – unconditional promise in writing made by one person (maker) to another (bearer), engaging to pay on demand or at a fixed or determinable future time, a sum certain in money.
- made by a buyer who has a weak credit position.
Advantages:
the time and amount of payment are indicated, avoiding litigation over such matters
may be endorsed to other parties allowing the creditor immediate use of funds tied up in such credit arrangement.

10. Trade Credit Cost of Trade Credit.
Firms extending trade credit provide incentives to firms who settle their accounts early. Those who do not avail of the trade discount incurs cost related to the trade credit which may be computed as follows:
Annual cost of Discount days
Not taking = x
Discount – Discount Number of - Discount
day’s credit period

11. Trade Credit Cost of Trade Credit.
If the credit term is 2/10, net 30 , the annual cost is computed as follows
Annual cost of
Not taking = x
Discount – days – 10 days
= x
= %

12. Commercial Banks
Commercial Banks – institutions which individuals or firms may tap as a source of short-term financing.
- corporations which accept or create deposits subject to withdrawal by check.
Four Components:
Commercial Banks
Development Banks
Savings Banks
Rural Banks

13. Commercial Banks
Short-term loans – those with maturity periods of one year or less
-generally offered by commercial banks for purposes which included financing of business activities.
Two types of Short-term loans
Unsecured loan (clean loan) - does not require a collateral
Secured Loans – requires a collateral back-up usually for accounts receivable financing or inventory financing. (a collateral is usually required when the credit standing of the borrower is inadequate to permit unsecured loan).

14. Commercial Paper Houses
Commercial Paper – short-term promissory note, generally unsecured which is sold through commercial paper dealers or directly to investors. - used to finance companies and business firms that borrow funds in the money market. Commercial Paper Houses (CPH) – firms that buy commercial papers. - finance short-term fund requirements of borrowing firms. - include banks and other financial institutions, like those engaged in selling insurance, educational, pension and mortuary plans.

15. Finance Companies
Finance Companies – engaged in making short and intermediate term installment loans to consumers, factor or finance business receivables, and finance the sale of business and farm equipment.
- funds are raised by issuing stock, bonds, borrowing from banks, and selling their commercial papers.
Three major types of finance companies:
1. Sales finance companies
2. Business or Commercial finance companies
3. Personal finance companies

16. Finance Companies
Sales Finance Companies – firms specializing in the purchase of retailers of the installment receivables arising out of retail sales of automobiles, household appliances, industrial equipment, farm equipment, and other durable goods sold on the installment payment plan. Business or Commercial Finance Companies – lend directly to a wide variety of businesses, mainly of small and medium size. Short-term loans are granted by this type of finance companies against the security of assigned accounts receivable, inventory, and equipment.

17. Finance Companies Business or Commercial Finance Companies (cont)
When using accounts receivable as collateral, the loan arrangement may be considered as:
Non-notification plan – the debtors of the borrowing firm are not aware that their accounts have been pledged as collateral for a loan from a finance company.
Notification plan – debtors are informed that their accounts have been pledged as collateral for a loan from a finance company.
Personal Finance Companies – engaged principally in personal loans. (may include miscellaneous business loans & commercial accounts receivable loans.)

18. Factors
Factoring – purchase of accounts receivables outright without recourse to the seller for credit losses.
- the factor takes it upon himself to collect the funds from the client’s customers, absorbing any credit losses incurred.
A claim for defective goods or dispute concerning shipments, is not the responsibility of the factor.
Advantages:
Receivables provide collateral for a loan that might not be otherwise available to the firm
Accounts receivable financing provides flexibility to the firm.

19. Insurance Companies
Insurance companies – provide a stable source of short-term funds. - invest on short-term commercial papers and promissory notes

20. Company Accruals
Accrual – expense that has been incurred but has not yet been paid.
- provide a source of short-term financing for business firms.
Two forms:
Accrued Wages and Salaries – salaries are paid as soon as they are rendered.
Accrued taxes – taxes has a longer time lag before it becomes due.

21. Financing Requirements of the Firm & the Sources of Short-Term Capital
Medium-term
Long-term
Open book
Trade creditors
Trade acceptance
Promissory note
Secured loan
Commercial bank
Unsecured loan
Commercial paper houses
Finance companies
Sales finance companies
Business finance companies
factor
Personal finance companies
Insurance companies
Company accruals

22. Thank you for
Listening!