Short-term financing
The main sources of short-term financing are (1) trade credits, (2) commercial bank loans, (3) commercial paper, a certain type of bonds, and (4) secured loans.
Trade credit
A company typically purchases its supplies and materials on credit from other companies and records the debt as acreditor. This trade credit, as it is commonly called, is the largest category of short-term credit. Credit terms are usually expressed with a discount for on-time payment. For example, the seller can state that a cash discount of 2 percent will be given if payment is made no later than 10 days after the invoice date. If the cash discount is not used, payment must be made no later than 30 days after the invoice date. The cost of not accepting cash discounts is the cost of the credit.
Commercial bank loans
Investment banklending is evidentbalanceas promissory notes and is the second best way to trade credit as a source of short-term financing. Banks occupy a central position in the short- and medium-term money markets. As a company's financing needs grow, banks are encouraged to provide additional funds. A single loan obtained from abankat onebusiness ventureis in principle no different from a loan taken out by a private individual. The company signs a conventional promissory note. The refund will be made in a lump sum per monthmaturityor in installments over the term of the loan. AA line of credit, unlike a single loan, is a formal or informal agreement between the bank and the borrower on the maximum loan balance the bank will allow at any time.
Advertising sheet
Commercial paper, a third source of short-term credit, consists of reputable companiespromissmainly sold to other companies, insurance companies, pension funds and banks. Commercial papers are issued for terms ranging from two to six months. Rates for prime commercial paper vary, but are generally slightly lower than rates for prime corporate loans.
A fundamental limitation of the commercial paper market is that its resources are limited to the excess liquidity available to companies, the main providers of funds, at any given time. Another disadvantage is the impersonality of the game; A bank is much more likely to help a good customer weather a storm than a commercial paper trader.
Loan with security
Most short-term business loans are unsecured, meaning an established business's credit rating qualifies for a loan. It is usually better to borrow on an unsecured basis, but often the borrower's creditworthiness is not strong enough to justify an unsecured loan. The most common types of collateral used for short-term credit are accounts receivable and inventory.
Financing through receivables can be done by mortgaging the receivables or by selling them outright, a process thatfactoringiUnited States. When a claim is pledged, the borrower retains the risk that the person or company that owes the claim will not pay; this risk is usually transferred to the lender when factoring is involved.
When loans are secured by inventory, the lender takes ownership of it. He may or may not take physical possession of them. In field storage, the inventory is under the physical control of a storage company, which only releases the inventory upon order of the credit institution. Canned goods, lumber, steel, coal, and other standardized products are the types of goods typically included in field storage.
Medium-term financing
While short-term loans are repaid in weeks or months, medium-term loans are scheduled for repayment in 1 to 15 years. Obligations that mature within 15 years or more are considered long-term debt. The main forms of medium-term financing are (1) term, (2) conditional sales contracts and (3) lease financing.
Term loans
A term is a business loan with a term longer than 1 year but shorter than 15 years. Normally the term is settled through systematic repayments (amortization payments) over the term. It can be secured by a proprietary mortgage on equipment, but larger, stronger companies can borrow on an unsecured basis. Commercial banks andlife insurancecompanies are the main suppliers of temporary loans. Interest costs on fixed-term loans vary depending on the size of the loan and the strength of the borrower.
Term loans carry greater risk for the lender than short-term loans. The credit institution's resources are tied up for a longer period of time, and during this time the borrower's situation may change significantly. To protect themselves, lenders often include in the loan agreement provisions that require the borrowing company to maintain its current liquidity ratio at a certain level, limit the purchase of fixed assets, keep its debt ratio below a certain amount and generally follow a policy that is acceptable. to the credit institution.
Conditional sales agreements
Contingent sales contracts are a common method of acquiring equipment by agreeing to pay for it in installments over a period of up to five years. The seller of the equipment remains the owner of the equipment until payment has been made.
Rentfinancing
There is no need to purchase assets to use them. Railroads and airlines in the United States, for example, have purchased much of their equipment by leasing it. Whether leasing is beneficial depends – apart from tax benefits – on the company's access to financial resources. Leasing offers an alternative financing method. However, a lease that is a firm obligation is similar to debt and uses some of the company's debt-bearing capacity. It is generally advantageous for a company to own its land and buildings because their value is likely to increase, but the same opportunity for appreciation does not apply to equipment.
It is often stated that leasing carries a higher interest rate than other forms of financing, but this is not always true. Much depends on the company's status as a credit risk. Additionally, it is difficult to separate the out-of-pocket costs of leasing from the other services that may be included in a leasing contract. If the leasing company can perform non-financial services (such as equipment maintenance) at a lower cost than the lessee or someone else could perform them, the effective cost of leasing may be lower than other financing methods.
Although leasing has fixed fees, it allows a company to present a lower debt-to-asset ratio in its financial statements. Many lenders give less weight to a lease obligation than to a loan obligation when examining financial statements.
