SOURCES OF SHORT TERM FUNDS
Referring to any investment, financial plan, or anything else lasting for one year or less. Short term investments and financial plans usually involve less uncertainty than long-term investments and financial plans because, generally speaking, market trends are more easily predictable for one year than for any longer period. Likewise, short-term financial plans are more easily amendable as a result of the short time frame. Short-term financial plans usually involve investing in short-term securities, such as T bills or commercial paper. Short–term borrowing
Usually short-term borrowing is between 1- 3years.
Short-term bank loan payable within 1-3 years.
A bank overdraft - An overdraft is for a very short period. Interest on a bank overdraft is charged at a variable rate on the amount by which the company is overdrawn from day to day. The limit of the overdraft is set by the bank for different firms. Accounts payable (trade credit) and accruals - Accounts payable are spontaneous sources of financing arising in the normal course of business and depend on the credit terms given. Accounts payable and accruals are considered to be interest free. They are deferred and paid later and therefore provide a free source of financing. Commercial Paper - This is a short-term financial instrument issued in the form of unsecured promissory notes with a fixed maturity date. A promissory note is a written promise to pay at a fixed future date, the amount shown on the note. Foreign Currency Markets (International Borrowing) - These are international markets dealing with foreign currencies. Funds are deposited with a bank outside the country of origin of the funds and the funds are then lent out on a short-term basis e.g. 3 months. Most foreign currency lending takes place between banks of different countries and is in the form of negotiable certificates of deposit.
SOURCES OF MEDIUM TERM FUNDS
Medium term borrowing is usually between 3-5 years.
i) Lease Transactions
Sale and Leaseback – A company obtains finance by selling its property e.g. sell a building and rent it back. b)
Operating Leases– These are rental agreements between a lessor and a lessee whereby: The lessor owns a capital asset, that is, supplies the asset e.g. Equipment to the lessee and is responsible for servicing and maintaining the leased equipment. The lessee (the borrower) makes payments under the terms of the lease to the lessor for a specified period of time which is less than the economic life of the asset. At the end of the lease period, the lessor takes back his asset and can lease it to another person or sell the asset second-hand.
(c) Finance Leases– this is an agreement between the user of the leased asset (lessee) and provider of finance (lessor) for most or the entire asset’s expected useful life. It’s characteristics are: - Lessee is responsible for servicing and maintenance of the asset. Lease has a primary period which covers all or most of the useful economic life of the asset. At the end of the primary period, the lessor can allow the lessee to keep the asset at a low nominal rent or sell the asset and keep most of the sale proceeds and only pay a small percentage to the lessor. Assets under finance leases are usually recognized in the balance sheet of the lessee.
(ii) Hire purchase transaction:
This is a form of installment credit where a company or individual purchases goods on credit and pays for them by installments. These transactions usually involve a finance house that provides funds to purchase a fixed asset on hire purchase. The buyer has ownership of the asset fully in his hands once all the installments have been paid. (iii) Government assistance:
This is where the government may provide finance in form of grants and other forms to companies especially in high-technology industries. However, this assistance is severely restricted. SOURCES OF LONG TERM FUNDS
This type of loan is...
References: Retrieved from http://www.differencebetween.com/difference-between-long-term-and-vs-short-term-financing/#ixzz2ftRYzB2c on the 25th of september, 2013.
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