1. Copyright ©2003 South-Western/Thomson Learning Chapter 18 Short- and Intermediate-Term Funding Alternatives

2. 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).

3. 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

4. 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 =

5. 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 

6. 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 = Interest costs Usable funds + Commitment fee  365 Maturity ( days )

7. 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 =

8. 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/

9. 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/

10. Financing From Foreign A/R Insured by the Export-Import Bank Contracts guaranteed by –Foreign bank –Government Trading companies

11. Inventory as Collateral Stability Characteristics –Perishability –Identifiability –Marketability –Price stability

12. Inventory as Collateral Continued Possession of the collateral –Floating lien –Trust receipt –Terminal warehouse –Field warehouse

13. Term Loan Maturity Sources Less expensive Better suited Working capital Default provisions Amortization Interest costs Loan agreements Warrants Security provisions Covenants

14. Sources of Term Loans Banks Insurance companies Pension funds Government agencies Equipment suppliers –Conditional sales contracts –Chattel mortgages

15. Government Agencies SBA –http://www.sba.gov/http://www.sba.gov/ Participation loans SBICs IDAs –Municipal bonds

16. 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

17. Covenants Affirmative Negative Restrictive