sourcesof shorth funds
TRANSCRIPT
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Chapter
Chapter
Sources of Short-TermFinancing
Sources of Short-TermFinancing
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Chapter 8 - Outline
Sources of Short-Term Financing
Trade Credit from Suppliers
Net Credit Position
Chartered Banks in Canada
Types of Short-term Loans Interest Rate Terminology
Corporate and Foreign Borrowing
Accounts Receivable Financing
Inventory Financing
Summary and Conclusions
PPT 8-2
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Sources of Short-Term Financing
There are various sources of short-term funds
available to a firm:
Trade Credit from Suppliers
Bank Loans
Corporate Promissory Notes
Bankers Acceptances
Foreign Borrowing
Loans Against Receivables and Inventory
PPT 8-3
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Figure 8-1
Structure of corporate debt, 2000
PPT 8-4
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Trade Credit from Suppliers
The largest source of short-term financing for a
firm-over 50% It is usually a 30-60 day grace period before a bill is
due
A cash discount is often given if payment is madewithin a specified time
Ex., 2/10 net 30 means a 2% discount is given if paid
in 10 days; if not, the full amount is due in 30 days
PPT 8-5
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Types of Short-term Bank Loans
Line of Credit: company is able to draw upon a yearly borrowing facility
arranged in advance revolving credits are for periods longer than 1 year
general purpose loans
Transaction Loan: short-term loan for a specific purpose
Compensating Balance: when a bank requires a minimum average account balance in
order to qualify for a loan
can be thought of as a form of collateral
less common than in the past
PPT 8-8
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Chartered Banks in Canada
http://www.rbc.com/
http://www.cibc.com/index.htmlhttp://www.bmo.com/
http://www.scotiabank.com/
http://www.tdbank.ca/index.html
http://www.nbc.ca
PPT 8-7
http://www.rbc.com/http://www.cibc.com/index.htmlhttp://www.bmo.com/http://www.scotiabank.com/http://www.tdbank.ca/tdbankhttp://www.nbc.ca/http://www.nbc.ca/http://www.tdbank.ca/tdbankhttp://www.scotiabank.com/http://www.bmo.com/http://www.cibc.com/index.htmlhttp://www.rbc.com/ -
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Compensating Balance:
when a bank requires a minimum average accountbalance in order to qualify for a loan
can be thought of as a form of collateral and
compensate the bank for its service
Compensating balances raise the cost of a loan, the
borrower must borrow more than the amountneeded
Amount borrowed = amount needed/ (1-C)
less common than in the past
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Interest Rate TerminologyPrime Rate:
the interest rate charged to a banks best customers acts as a benchmark for calculating other interest
rates
Effective Interest Rate:
the actual interest rate or true cost of a loan,including interest on interest (compounding)
PPT 8-9
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Figure 8-2
Prime interest rate movements
PPT 8-10
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Corporate and Foreign BorrowingCommercial Paper:
a short-term unsecured promissory note in minimum units of $50,000
sold (at a discount) by finance companies, other large corporations
cheaper than bank loans
total amount of commercial paper outstanding has increased greatly
in recent yearsBankers Acceptances
to finance goods in transit (particularly imports)
sold at a discountEurodollar Loans:
loans from foreign banks are called Eurodollar loans
(U.S Eurodollars predominate)
foreign interest rates may be lower
PPT 8-11
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Figure 8-3
Corporate short-term paper outstanding
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Figure 8-4
Comparison of commercial paper rate to
bank prime rate*
PPT 8-13
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Accounts Receivable Financing
A/R financing includes 3 choices:
pledging accounts receivable as collateral for a loan
an outright sale (factoring) of receivables to a
factoring company
Asset-backed Securities: sale of receivables by large
corporations in public offerings
Tends to be a relatively expensive source of financing
PPT 8-14
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Pledging accounts of receivable as
collateral Convenient means of financing. Receivables levels are rising
as the need for financing is increasing.
Lender screens accounts and loans a percentage (60% -
75%) of the acceptable amount.
Lender has full recourse against borrower.
The interest rate, which is usually in excess of the prime rate,
is based on the frequently changing loan balance
outstanding.
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Factoring Receivables
Receivables are sold, usually without recourse, to a factoring
firm.
A factor provides a credit-screening function by accepting or
rejecting accounts.
Factoring costs.
Commission of 1%-3% of factored invoices
Interest on advances
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Asset-backed public offerings
Public offerings of securities backed by receivables as
collateral is a recently employed means of short-termfinancing. These have included mortgages, car loans and
credit car receivables. Credit ratings often are better than
the issuing firm.
Several problems must be resolved:
Image: Historically, firms that sold receivables wereconsidered to be in financial trouble.
Computer upgrading to service securities.
Probability of losses on default of underlying securities.
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Inventory Financing
Inventory may be assigned as collateral security
against an operating loan.
The collateral value of inventory is based on several
factors.
Marketability Raw materials and finished goods are more
marketable than goods-in-process inventories.
Standardized products or widely traded commoditiesqualify for higher percentage loans.
Price Stability
Perishability
Ph sical control
LT 8-8
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Inventory control method
Blanket inventory liens: Lender has general claim against
inventory of borrower. No physical control.
Trust receipts: Also known as floor planning; the borrower
holds specifically identified inventory and proceeds from salein trust for the lender.
Warehouse: Goods are physically identified, segregated, andstored under the director of an independent warehousing
company. Inventory is released from warehouse openly upon
presentation of the warehouse receipt controlled by thelender.
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Longer-term Loans
Term Loan (Instalment Loan):
loan for 1-7 years interest rate may be fixed or change with prime rate
repaid in monthly or quarterly instalments
used to buy capital assets (ex; automobiles, property)
LT 8-9
PPT 8 16
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Summary and Conclusions
Short-term financing options
include:
trade credit from suppliersbank operating loans
commercial paper for large
companies
Eurodollar or foreign currency
loans
financing secured by accounts
receivable or inventoryBank operating loans move up or
down based upon the borrowers
need for working capital, and incur
interest based upon the prime rate
PPT 8-16