Short Term and Long Term Financing

Topics: Loan, Interest rates, Debt Pages: 18 (5167 words) Published: February 23, 2013
Sources of Short-Term and Long-Term Financing|

What is short-term financing?
Short term financing has repayment schedules of less than 1 year
A loan or credit facility with a maturity of one year or less. Source:
Sources of Short-Term Financing
* Trade Credits
* Accruals
* Commercial Papers
* Bank loans
* Banker’s acceptances
* Receivable financing
* Inventory financing
Advantages and Disadvantages of Short-term Financing
* Easier to arrange
* Less expensive
* Provides borrower more flexibility
* Interest rates fluctuate more often
* Refinancing is frequently needed
* May easily be adversely affected by delinquent payments Factors to be Considered in Choosing Sources of Short-term Financing
The factors to be considered in choosing short-term financing include the following: * Cost
* Restrictions. Lenders often require minimum level of working capital and/or minimum account balances * Flexibility. Some lenders periodically adjust the amount of funds needed by the borrower. * Reliability of the lender as a source of future borrowing Trade Credits

-acquisition of merchandise (or raw materials) on “open account” (without any formal not signed to evidence the liability) which gives rise to the current liability Accounts Payable Credit Terms
The credit terms are indicated on the supplier’s invoice such as: 2/10, N/30-2% discount if paid within ten days from date of invoice, account is due in 30 days 2/10, 1/20,
N/30-2% discount if paid within ten days from the date of invoice, 1% discount if paid after ten days up to the 20th day, account Is due in 30 days 2/10, N/30,
EOM-2% discount if paid within ten days from end of the month, account is due in 30 days from the end of the month

Foregoing Discounts on Purchases
Should we always avail of discounts? What is the implicit cost of foregoing discounts?
In determining whether discounts should be foregone, its implicit cost is computed and equated with factors such as opportunity cost involved, implicit back borrowing cost and the possibility of delaying payments beyond due dates without adversely affecting the firm’s credit rating. Cost of Foregoing Discounts

The implicit cost of foregoing discounts is computed taking into account the percentage of discount foregone based on the discounted amount, the number of days by which payment is postponed and the number of times this postponement can be made in one year. Example:

Fidel Santos purchases merchandise for P2,000, 2/10, N/30
The computations are as follows:
Discount= 2% fo P 2,000= P 40
Discount Amount= P 2,000 – 40= P 1,960
No. days payment
is postponed= 20 days (or 30-10 days)
No. of times by payment
can be postponed in one
year= 360 days/20 days= 18x
Cost of foregoing
Discount= (Discount / Discounted Amount) x (No. of times payment can be postponed in one year)
= (P40/P1,960)x (360/20) = 37%

Opportunity Cost
-benefit or profit the company fails to enjoy by availing the discount. Cost of Bank Borrowings
-cost of the borrowed money from financial institutions
Stretching Accounts Payable
-Scheduling payments for accounts payable beyond their due dates reduces the implicit cost of foregoing discounts. However, this practice may be adopted provided the credit rating of the company will not be adversely affected.

Accrual of Expenses
- expenses already incurred but not yet paid
-if expenses are allowed to accrue for a given length of period before they are paid, this is tantamount to loan availment from the supposed payees for the number of days by which payment is postponed. Commercial Papers

Is a short term unsecured promissory note issued by big firms of unquestionable credit standing and reputation. An unsecured, short-term debt...
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