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For the lending party to influence the borrowing party to pay and do not
stretch the payment period of their trade credit, they put credit term wherein
a discount may be taken if amount borrowed is paid on a given period. For
example, the term given is 2/10, N/30, this means that 2% discount may be
taken if the amount borrowed is paid within 10 days from the receipt of the
bill. Opportunity cost lost on this term if the discount is not taken may be
computed as:
Commercial banks take the second most important source of short term
financing. They provide nonspontaneous funds. These bank loans can have a
maturity date as early as 60 to 120 days from the date of inception of the
loan. Bank short term loans can also mature up to one to three years after
the inception of the loan. The terms depend on the bank and the amount of
money borrowed.
Many banks may also require collateral, depending again, on the amount
borrowed. The smaller the loan, the less apt the lender or bank is to ask for
collateral.
1. Amount borrowed
2. Interest rate
3. Repayment schedule
4. Any collateral that might have to be put up as a security for the loan,
and
5. Any other terms and conditions to which the bank and the borrower
may have agreed.
Line of Credit
A firm may arrange a credit arrangement with large commercial banks if
they still don’t wish to borrow until the funds is actually needed. The
arrangement may be in the form of:
1. Line of Credit
a. Informal arrangement with bank
b. The bank lends up to a specified maximum amount during a
designated period
2. Revolving Credit Agreement
a. Formal line of credit
b. Legal commitment by bank to extend credit up to some
maximum amount for a few months or several years.
Commercial Paper