Short Term Financing

Presented By: Dhaval Khera (15)

Objectives of the presentation:

TO UNDERSTAND The need for short-term financing. The advantages and disadvantages of shortterm financing. Types of short-term financing.
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Why Do Firms Need Short-term Financing?

Cash flow from operations may not be sufficient to keep up with growth-related financing needs. Firms may prefer to borrow now for their inventory or other short term asset needs rather than wait until they have saved enough. Firms prefer short-term financing instead of long-term sources of financing due to:
easier availability usually has lower cost matches need for short term assets, like inventory

To capture opportunity market.

Sources of Short-term Financing

Short-term loans. borrowing from banks and other financial institutions for one year or less. Trade credit. borrowing from suppliers Commercial paper. only available to large credit- worthy businesses.
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Types of short-term loans:

Promissory note
A legal IOU that spells out the terms of the loan agreement, usually the loan amount, the term of the loan and the interest rate. Often requires that loan be repaid in full with interest at the end of the loan period. Usually with a Bank or Financial Institution; occasionally with suppliers or equipment manufacturers .

Types of short-term loans:

Line of Credit
The borrowing limit that a bank sets for a firm after reviewing the cash budget. The firm can borrow up to that amount of money without asking, since it is pre-approved Usually informal agreement and may change over time Usually covers peak demand times, growth spurts, etc.
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Trade Credit
Trade credit is the act of obtaining funds by delaying payment to suppliers, who typically grant 30 days to pay. The cost of trade credit may be some interest charge that the supplier charges on the unpaid balance. More often, it is in the form of a lost discount that would be given to firms who pay earlier. Credit has a cost. That cost may be passed along to the customer as higher prices, (furniture sales, Office Max), or borne by the seller as lower profits, or some of both.

 Calculation is easiest if the loan is for a one year period: Effective Interest Rate is used to determine the cost of the credit to be able to compare differing terms.
Effective = Cost (interest + fees) Interest Rate Amount you get to use

Estimation of Cost of Short-Term Credit

Example: You borrow Rs10,000 from a bank, at a stated rate of 10%, and must pay Rs1,000 interest at the end of the year. Your effective rate is the same as the stated rate: Rs1,000/Rs10,000 = .

Advantages:
Economical Flexibility No interference in managerial decisions Zero Cash Investment May also serve for long-term purposes Supports opportunity market.

Drawback:
Fixed Burden Charge on assets Difficulty in raising finance Fluctuates balancing Figure Uncertainty Legal Formalities Etc.
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