short term financing policies
TRANSCRIPT
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SHORT TERM FINANCING
POLICIES
PRESENTED BY:
HASSAN NOOR
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SCHEME OF PRESENTATION
INTRODUCTION
SHORT TERM VS LONG TERM FINANCING
SELECTION PROCESS
TYPES OF SHORT TERM FINANCING
EFFECT OF LOAN TERMS ON EFFECTIVE INTEREST RATE
COLATERAL FOR SHORT TERM FINANCING
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INTRODUCTION
Short Term Financing:
It includes all financial products and techniques acompany may use to raise the cash needed within ayear or less.
Need For Financing:
a. Growth: Profits may not be higher enough to keep up at which they are buying new assets.
b. Choice: Rather than save money, firms borrow money to make their purchases.
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S.TERM VS L.TERM
FINANCING5
S.TERM VS L.TERM FINANCING
SHORT TERM
Cheaper than long term
Lower interest rates
Which pushes firms towards short term financing
If the rates go down you are not locked into a high rate for a long term.
LONG TERM
Less risky than short term
Borrower interest cost are certain
Borrower does not have to incur transaction cost
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EXTERNAL FINANCING SOURCE SELECTION PROCESS
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Determining the need
Considerations
Selecting the source
TYPES OF SHORT TERM FINANCING
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Loans From Bank And Other Institution
Commercial Paper
Trade Credit
TYPES OF SHORT TERM FINANCING
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LOANS FROM BANK
Two types of short term loans are:
Self-Liquidating: the one in which proceeds of loan are used to acquire assets that generate cash to repay.
Line Of Credit: The borrowing limit a bank sets for a firm.
Revolving Credit Agreement: a formal agreement between a bank and borrower to extend credit up to a certain amount for some time period.
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TRADE CREDIT
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TRADE CREDIT
DEF:
The act of obtaining funds by delaying payments to suppliers.
Cost Of Trade Credit: Trade credit effective annual interest rate formula is:
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π = 1 +πππ πππ’ππ‘ %
100βπππ πππ’ππ‘ %
365
πππ¦π π‘π πππ¦ βπππ πππ’ππ‘ ππππππ- 1
COMMERCIAL PAPER
DEF:
Unsecured notes issued by large, very credit worthy firms for up to 270 days. It is a cheaper alternative to getting a short term loan from a bank.
Cost Of Commercial Paper:
1. Compute discount from face value;
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360
DTGParDYD
π·π =πππ π£πππ’π βππ’ππβππ π πππππ
πππ π£πππ’π
360
πππ¦π π‘π πππ‘π’πππ‘π¦
CONTβ¦
2. Compute price of commercial paper;
3. Compute effective annual interest rate;
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DParice Pr
πΈπππππ‘ππ£π π΄πππ’ππ πΌππ‘ππππ π‘ πππ‘π =πππ
πππππ
365π·ππΊ
β 1
EFFECT OF LOAN TERMS ON
EFFECTIVE INTEREST RATE 15
EFFECT OF LOAN TERMS ON EFFECTIVE INTEREST RATE Simple Effective Interest Rate:
Loans having same effective interest rate as stated rate of interest.
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use get toYou $
pay $k
youInterest
DISCOUNT LOANS
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DISCOUNT LOANS
Discount Loans:
Loans in which interest is to be paid up front,at the time the loan is made, rather than atmaturity. In this the borrower receives the principleamount minus the interest owed. As a resulteffective interest rate is higher.
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But what does that mean?
CONTβ¦
Compensating Balances:
The loan term which specifies that while loan isoutstanding, the borrower must keep some minimumbalance in a checking account at the lender institution.
The amount required is called compensatingbalance. So, effective interest rate is higher.
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LOAN MATURITIES SHORTER THAN ONE
YEAR The effective annual interest rate of loan with maturities less than one year is calculated as:
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k = 1 +$ πππ‘ππππ π‘ π¦ππ’ πππ¦
$ π¦ππ’ πππ‘ π‘π π’π π
ππππ πππππππ ππ π¦ππππ
COLLATERAL FOR SHORT TERM LOANS
The promissory note that specifies the terms of theloan often includes the type of a collateral used to securethe loan.
Lenders require short term assets as collateralbecause they are more liquid. The major types of shortterm assets used for collateral are:
Accounts receivable as collateral
Inventory as collateral
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EXAMPLE
Suppose you borrow $5000 for one week, and banksconditions are 8% interest collected on discount basis with10% compensating balance. What is effective annualinterest rate of this loan?
(answer: 9.3% )
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Q & ANSWER WE ENCOURAGE YOU TO ASK.
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