A PRESENTATION ON SHORT TERM FINANCING

MEANING
SHORT TERM FINANCING IS A LOAN OR DEBT THAT IS SET UP TO HAVE PAYMENT MADE IN A SHORT PERIOD TIME. OF TIME. MANY CONSIDER REPAYMENT IN LESS THAN 1 YEARS TO BE "SHORT TERM", BUT IT CAN ALSO MEAN REPAYMENT MUST BE YEAR. MADE IN LESS THAN 5 YEAR.

WHY DO WE NEED SHORT TERM FINANCING??

START UP COSTS ACCOUNTS RECIEVABLES VS PAYABLES SHORT TERM OPERATIONAL COSTS EMERGENCY REPAIRS AND MAINTAINANCE CASH FLOW

SOUCES OF FINANCE
TRADE CREDIT BANK CREDIT ARRANGEMENT S COMMERCIAL PAPER SECURED BORROWINGS FACTORING ACCRUED EXPENSES AND DEFFERED INCOME OFF BALANCE SHEET FINANCING COMMERCIAL FINANCE COMPANIES

UNSECURED BORROWINGS

TRADE CREDIT

MEANING OF TRADE CREDIT

WHENEVER A BUSINESS RECIEVES MERCHANDISE ORDERED FROM A SUPPLIER AND THEN IS PERMITTED TO WAIT A SPECIFIED PERIOD OF TIME BEFORE HAVING TO PAY, IT IS CREDIT. RECEIVING TRADE CREDIT. SMALLER RELY BUSINESS USUALLY

 TRADE CREDIT IS EXTENDED ON EITHER OF THE FOLLOWING BASIS: OPEN ACCOUNT BASIS PROMISSORY NOTES

COST OF TRADE CREDIT

CREDIT TERMS

STRETCHING ACCOUNTS PAYABLE

TRADE CREDIT

CREDIT TERMS
IT SPECIFY THE CONDITIONS UNDER WHICH A BUSINESS IS REQUIRED TO REPAY THE CREDIT. CREDIT. CREDIT TREMS INCLUDE: INCLUDE:
LENGTH & THE BEGINNING DATE OF THE CREDIT PERIOD CASH DISCOUNT (IF ANY)

COST OF TRADE CREDIT

IT MAY APPEARS TO FREE BECAUSE OF INTEREST CHARGES NOT BE COST LACK OF BUT ITS

SUPPLIER INCURS THE COST OF: OF:

FUNDS INVESTED IN ACCOUNTS RECIEVABLES ANY CASH DISCOUNT THAT ARE TAKEN

STRETCHING ACCOUNTS PAYABLE

IT MEANS POSTPONEMENT OF THE PAYMENT OF THE AMOUNT DUE TO BEYOND THE END OF THE CREDIT PERIOD. PERIOD. STRETCHING PERIOD GENERATES ADDITIONAL SHORT TERM FINANCING OF THE FIRM BUT IT IS FREE. NOT COST FREE.

STRETCHING ACCOUNT PAYABLE INVOLVES COSTS SUCH AS: COST OF FORGOING CASH DISCOUNT DETERIORATION OF CREDIT RATING ABILITY TO OBTAIN FUTURE CREDIT LATE PAYMENT PENALITIES. PENALITIES. INTEREST CHARGES. CHARGES.

ACCRUED EXPENSES & DEFFERED INCOME

ACCRUED EXPENSES
IT REPRESENT LIABILITIES FOR SERVICES RENDERED TO THE FIRM THAT HAVE NOT YET BEEN PAID FIRM. FOR BY THE FIRM. THEY CONSTITUTE AN INTEREEST FREE SOURCE OF FINANCING EXAMPLE:EXAMPLE:
ACCRUED WAGES. WAGES.

DEFFERED INCOME
DEFFERED INCOME CONSISTS OF PAYMENTS RECEIVED FOR GOODS AND SERVICES THAT THE FIRM HAS AGREED TO DELIEVER DATE. AT SOME FUTURE DATE. ADVANCE PAYMENTS MADE BY CUSTOMERS ARE THE PRIMARY INCOME. SOURCES OF DEFFERED INCOME.

COMMERCIAL PAPER

 IT CONSISTS OF SHORT TERM UNSECURED NOTES. PROMISSORY NOTES. MATURITIES AT THE TIME OF MONTHS. RANGES FROM DAYS TO MONTHS. IT IS SOLD ON DISCOUNT BASIS. BASIS. ANNUAL FINANCING COST DEPENDS ONONISSUE

MATURITY DATE OF THE ISSUE THE PREVAILING SHORT TERM INTEREST RATE. RATE.

DISADVANTAGES
NOT ALWAYS A SOURCE OF FUNDS RELIABLE

COMMERCIAL PAPER MARKET IS IMPERSONAL CANNOT BE PAID OFF UNTIL MATURITY. MATURITY.

BANK CREDIT ARRANGEMENTS

SINGLE PAYMENT LOAN

LETTER OF CREDIT BANK CREDIT ARRANGEMENT S

LINE OF CREDIT

TERM LOAN

REVOLVING CREDIT AGREEMENT

A.SINGLE PAYMENT LOAN/NOTE

IT IS FREQUENTLY GRANTED FOR A SPECIFIC FINANCIAL PURPOSE WITH A DEFINITE BEGINNING AND ENDING TIME. TIME. IT CAN BE EITHER A DISCOUNT NOTE NOTE. OR AN ADD ON NOTE. THE SINGLE PAYMENT NOTE IS THE SIMPLEST TYPE OF LOAN, IT IS FREQUENTLY USED IN CONJUNCTION CREDIT. WITH ANOTHER TYPE OF CREDIT.

B.LINE OF CREDIT
A LINE OF CREDIT IS AN AGREEMENT BETWEEN A BANK AND A FIRM THAT PERMITS THE FIRM TO BORROW UP TO A SPECIFIED LIMIT DURING A PERIOD. PARTICULAR TIME PERIOD.

PURPOSE OF LINE OF CREDIT

TO SUPPLY FUNDS TO MEET THE SHORT TERM,FREQUENTLY SEASONAL, CASH FLOW NEEDS OF THE BORROWER. BORROWER. TO PROVIDE A BACKUP SOURCE OF CASH TO PAY OFF MATURING PAPER. COMMERCIAL PAPER. TO PROVIDE A LIQUIDITY CUSHION OR INSURANCE. FINANCIAL INSURANCE.

C.REVOLVING CREDIT AGREEMENT IT IS SIMILAR TO LINE OF CREDIT BUT IS USUALLY FOR YEAR. MORE THAN 1 YEAR. EVERGREEN LOAN THERE IS A COMMITMENT FEE PAID ON UNUSED PORTION OF CREDIT. THE CREDIT.

D.TERM LOAN
IT IS A SPECIFIC LOAN AGREEMENT, HAVING A FIXED MATURITY USUALLY YEARS. OF 2 TO 5 YEARS. REPAID IN PERIODIC INSTALLMENTS IT INVOLVES HIGHER TRANSACTION COSTS. COSTS.

E.LETTER OF CREDIT
IT IS A GURANTEE FROM A BANK STATING THAT A LOAN WILL BE MADE TO THE CLIENT IF MET. SPECIFIED CONDITIONS ARE MET. IT IS COMMONLY USED TO TRADE. FINANCE INTERNATIONAL TRADE.

UNSECURED BORROWINGS

 THIS LOAN IS BASED STRENGTH OF THE STATEMENT AND BALANCESHEET OF ORGANISATION. ORGANISATION. GRANTED ONLY TO COMPANIES. FINANCIAL COMPANIES.

ON THE INCOME THE THE

STRONG

SECURED BORROWING

 A SECURED LOAN IS ANY LOAN THAT GIVES THE LENDER A CLAIM ON A SPECIFIC SET OF DEFAULT. ASSETS IN CASE OF DEFAULT.
COLLATERALISED LOAN APPROACHES AN ASSET BASED LOAN

COLLATERALISED LOAN
SECONDARY SOURCE. SOURCE. REPAYMENT

IF THE BORROWER FAILS TO PAY LOAN THEN THE COLLATERAL CAN BE SEIZED. SEIZED.

ASSET BASED LOAN

THE ASSETS MOST COMMONLY TAKEN AS COLLATORAL FOR A SHORT ARETERM LOAN ARE ACCOUNTS RECEIVABLES INVENTORY

COMMERCIAL FINANCE COMPANIES

 THESE ARE PRIVATE COMPANIES LOANS. THAT MAKE COMMERCIAL LOANS. THEY RAISE FUNDS THROUGH ISSUANCE OF SECURITIES SUCH AS COMMERCIAL PAPER EQUITY SHARES LOANS. AND BANK LOANS. THEY CHARGE HIGHER INTEREST RATE THAN BANKS AND CONCENTRATE ON ASSET BASED LENDING. LENDING.

FACTORING

 FACTORING IS THE SALE OF ACCOUNTS RECIEVABLE, USUALLY WITHOUT RECOURSE, TO ANOTHER PARTY, HEREAFTER CALLED THE FACTOR. FACTOR.
TYPE OF FACTORING ARRANGEMENT S

MATURITY FACTORING

CONVENTIONA L FACTORING

MATURITY FACTORING WITH AN ASSIGNMENT OF EQUITY

 A.MATURITY FACTORING
IT CONSISTS OF THE SALE OF ACCOUNTS RECIEVABLE TO A FACTOR WITH NO SALE. ADVANCE OF FUNDS AT THE TIME OF SALE.

B.CONVENTIONAL FACTORING
IN IT THE FACTOR PERFORMS ALL OF THE FUNCTIONS OF MATURITY FACTORING AND ALSO ADVANCES FUNDS TO THE SELLER PRIOR TO THE AVERAGE MATURITY DATE OF THE RECIEVABLES

C.MATURITY FACTORING ASSIGNMENT OF EQUITY

WITH

THE FACTOR IN THIS CASE DOES NOT PURCHASE RECIEVABLES BUT MAKES LOANS AGAINST THEM WITH RECOURSE TO THE SELLER IF PAYMENTS ARE NOT COLLECTED

OFF BALANCE SHEET FINANCING

 IT IS AN FINANCIAL AND NOT RATIOS. RATIOS.

ATTEMPT TO KEEP STATEMENTS CLEAN DISTORT FINANCIAL

IN THIS THE FIRM ENTERS INTO PARTY. A CONTRACT WITH THIRD PARTY. THE THIRD PARTY OBTAINS FINANCING THROUGH A BANKERS ACCEPTANCE. ACCEPTANCE.

CALCULATING THE COST OF A SOURCE OF SHORT TERM FINANCING

GENERATE LIST OF SOURCES THAT ARE AVAILABLE COMPOUNDE D EAI OF FUNDING SOURCE

MAXIMUM AMOUNT OF NET CAST PROVIDED BY THAT SOURCES

EXAMPLE
PVT. LTD. NAVYUG PVT. LTD. HAS JUST ACQUIRED A ACCOUNT. LARGE ACCOUNT. AS A RESULT, IT NEEDS AN RS. ADDITIONAL RS. 7.50 CRORE IN WORKING IMMEDIATELY. CAPITAL IMMEDIATELY. IT HAS BEEN DETERMINED THAT THERE ARE THREE FUNDS: FEASIBLE SOURCES OF FUNDS: CREDIT: 1) TRADE CREDIT: THE COMPANY BUYS ABOUT RS. RS. 5 CRORE OF MATERIALS PER MONTH ON 10,NET 40. TERMS OF 2/10,NET 40. LOAN: 2) BANK LOAN: THE FIRMS BANK WILL LEND RS. PERCENT. RS. 10 CRORE AT 15 PERCENT. A 10 PERCENT COMPENSATING BALANCE WILL BE REQURED. REQURED.

3) A FACTOR WILL BUY THE COMPANYS (RS. RECEIVABLES (RS. 10 CRORE/MONTH), WHICH HAVE A COLLECTION PERIOD OF 60 DAYS. DAYS. THE FACTOR WILL ADVANCE UP TO 75 % OF THE FACE VALUE OF THE RECEIVABLES AT 14 % ON AN ANNUAL BASIS. BASIS. THE FACTOR WILL ALSO CHARGE A 50% 2.50% FEE ON ALL RECEIVABLES PURCHASED. PURCHASED. IT HAS BEEN ESTIMATED THAT THE FACTORS SERVICES WILL SAVE THE COMPANY A CREDIT DEPARTMENT EXPENSE AND BAD DEBT RS. 15,00, MONTH. EXPENSES OF RS. 15,00,000 PER MONTH. ON THE BASIS OF ANNUAL % COST, WHICH ALTERNATIVE SHOULD NAVYUG SELECT?

CASE STUDY
MADHAV FINANCE COMPANY (MFC)

 LONG DEPRESSED PHASE IN FINANCIAL SERVICE INDUSTRY HAS AFFECTED ROI MADE BY MFC ON INFRASTRUCTURE AND MANPOWER. MANPOWER. DURING THE FIRST PHASE SEVERE LIQUIDITY CRUNCH AND HIGH INTEREST BURDEN HAVE AFFECTED ALL SEGMENTS OF INDIAN ECONOMY AND HAVE SLOWED DOWN THE RATE OF GROWTH. GROWTH. IT RESULTED IN AN INCREASE IN NONNONPERFORMING ASSETS FOR NON BANKING COMPANIES(NBFCS). FINANCE COMPANIES(NBFCS). 2ND HALF OF YEAR, IS ALSO NOT ENCOURAGING DUE TO FURTHER SLOWING DOWN OF THE ECONOMY. ECONOMY.

 INSPITE OF THIS DEPRESSED PHASE MFC IS DETERMINED TO INCREASE ITS SHARE IN EACH OF ITS BUSINESS SEGMENTS AND TO BECOME A DOMINANT PLAYER IN THE INDUSTRY. FOCUS OF THE COMPANY IS UPON CONSOLIDATING THE EXISTING BRANCH NETWORK BY INCREASING THE MARKET SHARE. IMPROVEMENT OF QUALITY AND PRODUCTIVITY OF EMPLOYEES STRENGTHENING ITS TECHNOLOGY BASE.
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 THE PRINCIPAL PURSUIT OF MADHAV FINANCE COMPANY HAS BEEN ASSET BASED FINANCING, BY WAY OF LEASE AND HIRE PURCHASING WITH DUE EMPHASIS ON QUALITY RETURN AND RISK. THE VALUE OF GROSS ASSETS UNDER LEASE AND HIRE PURCHASE ROSE TO RS.24735.95 LACS FROM RS.19418.00 LACS. IN VIEW OF THE PRESENT MARKET CONDITIONS THE COMPANY IS NOW MORE SELECTIVE IN ITS CHOICE OF CLIENTS. 46

SHORT TERM TRADE FINANCE

IN SHORT TRADE FINANCE THE COMPANY HAS REMAINED ACTIVE BY WAY OF BILL DISCOUNTING AND DEPOSITS. INTER CORPORATE DEPOSITS. GROSS FUNDING IN THISACTIVITY RS.2665. WAS RS.2665.89 LACS AGAINST RS.1706. RS.1706.77 LACS IN THE PREVIOUS YEAR. YEAR.
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COLLATERAL FINANCE ACTIVITY

COLLATERAL FINANCE ACTIVITY HAS SHOWN SUBSTANCIAL 1997-98. INCREASE DURING 1997-98. RS.761. I.E RS.761.67 LACS AS AGAINST RS.499. LACS. RS.499.17 LACS.

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MERCHANT BANKINGDIVISION
INSPITE OF LONG SUBDUED ENVIRONMENT IN THE CAPITAL MARKET THE PERORMANCE OF THE MERCHANT BANKING DIVISION OF MFC SATISFACTORY. WAS SATISFACTORY. FEE INCOME WAS RS.171.80 LACS IN RS.171. 1997RS.165. 1997-98 AGAINST RS.165.07 LACS IN 19961996-97
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 AT PRESENT MFC IS STRENGTHENING ITS DISTRIBUTION CAPABILITY. THE DISTRIBUTION NETWORK HAS NOW EXPANDED TO DISTRIBUTE MUTUAL FUNDS AND PRIMARY MARKET ISSUES TO SUPPORT THE MERCHANT BANKING ACTIVITIES AND GENERATING FEE INCOME. MFC HAS CONTINUED TO MAINTAIN GROWTH IN RESOURCE MOBILISATION AND HAS RAISED RS.300 LACS THROUGH REEDEMABLE CUMULATIVE PREF. SHARES.
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EDWARD ALTMAN
IN 1990S MFC HAS BEEN ABLE TO MAINTAIN ITS GROWTH. IN ORDER TO ENSURE QUALITY OF ASSETS , LENDING NORMS , AND MONITORING PROCESS HAVE BEEN FURTHER TIGHTENED. FOR THIS THE CREDIT SCORE MODEL OF EDWARD ALTMAN IS USED WHICH APPLY MULTIPLE DISCRIMINANT ANALYSIS.

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 ALTMAN INDEX IS: IS: Z = 3.3(EBIT/Total Sales) + 1.0(Sales/Total Sales) + 0.6(Market Value Of Equity/Book value Of Debt) + 1.4(Retained/Total Sales) + 1.2(working Capital/Total Assets). Assets).
14-01-2013

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 AS PER ALTMAN FIRMS THAT WENT BANKRUPT SCORES LESS THAN 2.7 BANKRUPTCY. ONE YEAR PRIOR TO BANKRUPTCY. RS NAIDU (FINANCIAL CONSULTANT) HAS BEEN ENGAGED BY MFC TO COMMENT ON 9 APPLICANTS MODEL. APPLYING CREDIT SCORE MODEL.

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EBIT/ Total Sales (1) Applicant 1 Applicant 2 Applicant 3 Applicant 4 Applicant 5 Applicant 6 Applicant 7 Applicant 8 Applicant 9 (2) .25 .25 .20 .15 .25 .20 .20 .30 .25

Sales/ Total Sales (3) .30 .40 .50 .20 .30 .25 .40 .50 .30

M.V. of Equity/B.V. of Debt (4) 1.2 1.5 1.2 1.0 1.4 1.5 1.5 1.2 1.6

Earnings/ Total Assets (5) .3 .4 .5 .4 .3 .4 .6 .5 .7

Working Capital/ Total Assets (6) .4 .5 .7 .5 .6 .4 .5 .6 .4

APPLYING THE ALTMAN INDEX, THE LOAN APPLICANTS PROBABLITY OF DEFAULTING NEXT YEAR: APPLICANT 1: Z=3.3(.25)+1.0(.30)+0.6(1.2)+1.4(.3)+1.2(.4) 2.745 > 2.7ACCEPTED APPLICANT 2: Z=3.3(.25)+1.0(.40)+0.6(1.5)+1.4(.4)+1.2(.5) 3.285> 2.7ACCEPTED APPLICANT 3: Z=3.3(.20)+1.0(.50)+0.6(1.2)+1.4(.5)+1.2(.7) 3.420 > 2.7ACCEPTED

APPLICANT Z=3 25)+ )+1 30)+ )+0 )+1 )+1 Z=3.3(.25)+1.0(.30)+0.6(1.4)+1.4(.3)+1.2(.6) ACCEPTED 3.105 > 2.7ACCEPTED APPLICANT Z=3 20)+ )+1 25)+ )+0 )+1 )+1 Z=3.3(.20)+1.0(.25)+0.6(1.5)+1.4(.4)+1.2(.4) 2.850 > 2.7ACCEPTED ACCEPTED APPLICANT Z=3 20)+ )+1 40)+ )+0 )+1 )+1 Z=3.3(.20)+1.0(.40)+0.6(0.5)+1.4(.6)+1.2(.5) REJECTED 2.530 < 2.7REJECTED APPLICANT Z=3 30)+ )+1 50)+ )+0 )+1 )+1 Z=3.3(.30)+1.0(.50)+0.6(1.2)+1.4(.5)+1.2(.6) ACCEPTED 3.630 > 2.7ACCEPTED

5:

6:

7:

8:

 NAIDU WILL RECOMMENDED THE REJECTION OF TWO LOAN CASES, NAMELY, OF APPLICANTS 4 AND 7 SINCE THEY ARE NOT IN ACCORDANCE ALTMAN. WITH THE NORMS OF ALTMAN.