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TERM FINANCING
SOURCES
bank overdraft trade credit Accrued expenses & deferred income Commercial paper Bank credit arrangements Unsecured borrowing Secured borrowing , factoring Commercial finance companies
Bank Overdraft
Most businesses have an account with a bank. The bank deals with all the deposits (money put into the account) and withdrawals (money taken out). Most banks know that businesses do not always receive money from sales straight away.
Cash outflows from a business (Payment for raw materials, stock, labour, insurance, rent, etc.)
When differences occur in the money a business receives from sales (its revenue or turnover) and the money it has to pay out on labour, machinery, equipment, distribution and so on (its costs) the firm can face difficulties.
Trade credit
A firm sends a purchase order to a supplier , who then evaluates the firms creditworthiness using various information sources. If the supplier decides to extend the firm credit, he sells the ordered merchandise to the firm, along with invoice describing the contents of sale, the total amount due & the terms of sale
IS
TRADE CREDIT INCLUDE COST ?
Commercial paper
It consist of short-term unsecured promissory note issued by major corporations. Maturities on commercial paper at the time of issue ranges from days to months.
It is sold on discount basis. Borrowers also may pay a placement fee.
Types
Line of credit Revolving credit agreement Term loan Letter of credit
Line of credit
It is an agreement between a bank and a firm that permits the firm to borrow up to a specified limit during a particular time period.
Primary purpose : to meet short term, cash flow needs Second purpose : to provide a backup source of cash to payoff maturing commercial paper
Term loan
It is more specific loan agreement than a line of credit . It has a fixed maturity usually 2 to 5 years . The total amount of loan is forwarded to the borrower on origination & is repaid in periodic instalments.
Letter of credit
It is commonly used to finance international trade
Trust receipts
FACTORING
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