chapter 16 short-term business financing © 2000 john wiley & sons, inc
TRANSCRIPT
Chapter 16
Short-Term Business FinancingShort-Term Business Financing
© 2000 John Wiley & Sons, Inc.
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Chapter Outcomes NWC Identify and describe strategies for
financing working capital. Identify and briefly explain the factors that
affect short-term financing requirements. Identify the types of unsecured loans
made by commercial banks to business borrowers.
Describe the use of accounts receivable, inventory, and other sources of security for bank loans.
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Explain the characteristics, terms, and costs of trade credit.
Explain the role of commercial finance companies, factors, Small Business Administration, and commercial paper in providing short-term business financing.
Chapter Outcomes, continued
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Strategies for Financing Working Capital
Working capital Net working capital NWC and financing strategy
– If NWC>0
$ of current assets financed with long-term funds
– If NWC<0
$ of fixed assets financed with current liabilities
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Another way to look at a firm’s assets...
Fixed Assets Permanent current assets Temporary current assets Asset levels fluctuate over time for a
firm
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Asset Trends for a Growing FirmA
sset
s ($
)
Time
Fixed Assets
Permanent Current Assets
Temporary or Fluctuating Temporary or Fluctuating Current AssetsCurrent Assets
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Asset Trends for a Growing Firm:Maturity Matching
Ass
ets
($)
Time
Fixed Assets
Permanent Current Assets
Temporary or Fluctuating Temporary or Fluctuating Current AssetsCurrent Assets
Lon
g-te
rm f
inan
cin
gSh
ort-
term
fi
nan
cin
g
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Asset Trends for a Growing Firm:Aggressive Financing
Ass
ets
($)
Time
Fixed Assets
Permanent Current Assets
Temporary or Fluctuating Temporary or Fluctuating Current AssetsCurrent Assets
Lon
g-te
rm f
inan
cin
gSh
ort-
term
fin
anci
ng
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Asset Trends for a Growing Firm:Conservative Financing
Ass
ets
($)
Time
Fixed Assets
Permanent Current Assets
Temporary or Fluctuating Temporary or Fluctuating Current AssetsCurrent Assets
Lon
g-te
rm f
inan
cin
gSh
ort-
term
fin
anci
ng
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Basic Financing Strategies
Maturity matching
Aggressive
Conservative
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Influences on the short-term/long-term financing decision
Risk/return implications Rate volatility Credit availability/crunch Operating characteristics of firm Flexibility Ease of future financing
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Patterns of Short-Term and Long-Term Financing over Time
Pattern of Short-Term Financing
Pattern of Long-Term Financing
Time
Time
$
0
$
0
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Commercial Bank Lending
Line of Credit
Revolving Credit Agreement
Accounts Receivable Financing
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Line of Credit
Clean up period Periodic re-approval Compensating balance versus fees
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Revolving Credit Agreement
Commitment by bank Charge on unused funds
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Accounts Receivable Financing
Pledging receivables– <80 percent of AR value
Interest rate + fees
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Computing interest rates
EAR = (1 + APR/m)m - 1 $10,000 loan, 6 months, 8%APR EAR = (1 + .08/2)2 - 1 = 8.16%
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Discounted Loans
Discounted loan $ received = loan amount - interest = $10,000 - $400 = $9600
Periodic rate = $400/9600
APR = 8.51% Loan request = funds needed
1 - discount %
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Inventory Loans
Percent of value lent depends on inventory characteristics
Blanket inventory loan Trust receipt Warehouse receipt
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Loans can be secured by...
Stock and bonds Cash value of life insurance policy Co-signer
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Trade Credit
Net date Trade discounts
2/10 net 30 Cost of trade credit
Pay $98 within 10 days or pay $100 within 30 days
Cost: extra $2 for delaying 20 days
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Cost of Trade Credit
Cost: extra $2 on a $98 charge for delaying 20 days
Approx. effective cost = 2/98 x 365/20 = 37.2%
General formula:
Percent discount x 3 6 5 days
100%-discount % net days-discount days
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Commercial Finance Companies
Organization without a bank charter that advances funds to businesses
– discounts receivables
– secured machinery loans
– inventory loans
– leases Higher cost than bank loans
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Factors
Purchases receivables and assumes credit risk
Can supplement or replace a firm’s credit department
Two types of factoring:– maturity factoring– advance factoring
Cost: interest plus charges
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Other sources
Small business:– SBA guaranteed loans
Large business:– commercial paper– proceeds =
issue size less interest less
placement fees