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Short-Term Financing Sources Explained

The document outlines three major sources of short-term financing: trade credit, commercial bank loans, and commercial paper. It details the structures of bank loans, including fixed-term notes and lines of credit, as well as the differences between secured and unsecured loans. Additionally, it describes commercial paper as a short-term unsecured loan sold in large amounts, typically by corporations to financial institutions.

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Christian Alinabo
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21 views2 pages

Short-Term Financing Sources Explained

The document outlines three major sources of short-term financing: trade credit, commercial bank loans, and commercial paper. It details the structures of bank loans, including fixed-term notes and lines of credit, as well as the differences between secured and unsecured loans. Additionally, it describes commercial paper as a short-term unsecured loan sold in large amounts, typically by corporations to financial institutions.

Uploaded by

Christian Alinabo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as DOCX, PDF, TXT or read online on Scribd

Short-term Financing Housing Loan Rates

Three major sources of short-term financing:

1. Trade credit (accounts payable)

2. Commercial bank loans

3. Commercial paper

Bank Loans

 Loan from a bank


 Employed to finance inventory and accounts receivable Car Loan Rates
 Used as source of funds to enable firm to take discounts on accounts payable
when cost of missed discounts exceeds interest cost of bank debt

Two possible Structures of Bank Loans

1. Note for a fixed period of time


 At end of note term (maturity date), face amount of note must be repaid or
note must be renewed (“rolled over”).
 Bank and borrower may enter into formal/informal agreement to renew note
at maturity at specified rate, which is tied to prime interest rate (rate charged
to bank’s best corporate customers). o Ex. Interest rate at prime plus some
percentage over prime: “prime plus 2%” SME Loan Rates
 Size of premium above interest rate is determined by bank’s assessment of
risk involved in making loan o Higher risk, higher premium
 As prime rate changes, bank’s cost of obtaining funds changes, so requiring
firm to roll over its notes allows bank to change interest rate on note.

2. Line of credit (“revolver”)


 Bank establishes upper limit on amount firm may borrow and firm draws
whatever money it needs against credit line up to maximum.
 Interest rate may be fixed or float with prime or LIBOR rate.
 Interest is charged only on amount actually borrowed, not total amount
available.
TYPES OF LOANS

Secured Loans:

 A form of debt for money borrowed in which specific assets have been
pledged to guarantee payment.

Unsecured Loans :

 A form of debt for money borrowed that is not backed by the pledge of
specific assets.
Interest Rates Commercial Papers

Collect Basis  These are short-term unsecured loan that is sold in large peso amounts
through commercial paper dealers
 interest at maturity of the note
 Sold by large corporations
Scenario:  Usually purchased by other corporations (as an outlet for marketable
securities) or by financial institutions (i.e. banks, money market mutual funds)
Loan 10,000 Interest-1000
Types of Commercial Paper

 Draft
 Check
 Note
 Certificates of Deposit

Discount Basis

 Initial loan-interest

Scenario:

Loan 10.000 Interest-1000

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