Working capital financing - Financial Management

Working capital financingoShort term finance capital can be availed from a wide range of financial intermediaries.The credit can be secured or unsecuredLoans

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SOURCES OF WORKING CAPITAL FINANCE

SOURCES OF PERMANENTWORKING CAPITAL SHARES DEBUNTURES PUBLIC DEPOSITS PLOUGHING BACK OF PROFITS LOANS FROM FINANCIAL INSTITUTIONS

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INSTRUMENTS FOR FINANCING TEMPORARY WC NEEDS COMMERCIAL PAPER(CP) INTER-CORPORATE DEPOSITS(ICD) ACCRUED EXPENSES TAXES TRADE CREDIT BANK LOANS FACTORING

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WORKING CAPITAL FINANCE BY COMMERCIAL BANKS LOANS CASH CREDIT OVERDRAFTS DISCOUNTING OF BILLS

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UNSECURED LOANS

Unsecured loans have their security only in the lender’s faith in the borrower’s capacity to pay.

Unsecured loans have lesser interest rate than secured loans.

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SECURED LOANS

Secured loans are those loans which need a security/collateral from the borrower to the lender.

Secured loans have higher interest rates due to:-1. Less credit worthiness of the borrower2. Higher risk of default3. Increased loan administration costs

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COMMERCIAL PAPER

It is an unsecured promissory note issued by firms to raise short-term funds.

Maturity period ranges from 91 to 180 days It is sold at a discount from its face value and

redeemed at face value on its maturity

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INTER CORPORATE DEPOSITS AN INTER CORPORATE DEPOSIT IS AN UNSECURED LOAN EXTENDED BY ONE CORPORATE TO ANOTHER FACILITATES THE MOVEMENT OF FUNDS FROM FUND SURPLUS COMPANIES TO CREDITWORTHY CORPORATE BORROWERS THE COST OF SUCH FUNDS ARE HIGHER THAN THE BANK RATES THE PERIOD OF DEPOSITS VARIES FROM PURELY ON CALL TO 180 DAYS

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ACCOUNTS RECEVABLE FINANCINGACCOUNTS RECEVABLE IS THE MOST LIQUID ASSETS

WHICH SERVE AS PRIME COLLATERAL FOR ASECURED LOAN

PLEDGING FACTORING

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PLEDGING

A PLEDGE OF ACCOUNTS RECEIVABLE IS THE USE OF A FIRM’S RECEIVABLES TO SECURE A TERM LOAN.STEPS INVOLVED:-1. LENDER EVALUATES THE QUALITY OF ACCOUNTS RECIVABLES2. SELECTS THE ACCEPTABLE ACCOUNTS3. FILES A LIEN ON THE COLLATERAL4. DETERMINES THE PERCENTAGE ADVANCED AGAINST RECEIVABLES

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PLEDGING

FEATURES PLEDGING USUALLY COSTS 2 TO 5 PERCENT ABOVE

THE BANK’S PRIME LENDING RATE PLEDGING ACCOUNTS RECEIVABLE IS VERY EASY

AND FLEXIBLE FINANCING IS DONE ON CONTINOUS BASIS

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FACTORING

FACTORING IS THE OUTRIGHT SALE OF ACCOUNTS RECEIVABLE TO THE FACTOR OR FINANCIAL INSTITUTION

FEE IS NORMALLY STATED AS A PERCENT OF THE FACE VALUE OF ALL RECEIVABLES FACTORED( USUALLU 1 TO 3 PERCENT)

RISK IS ALSO TRANSFERRED TO THE FACTOR

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SPONTANEOUS FINANCING

THE SHORT TERM SPONTANEOUS FINANCING IS THE FINANCING THAT ARISES FROM THE NORMAL OPERATING CYCLE.

THE TWO MAJOR SOURCES OF SPONTANEOUS FINANCING ARE

ACCRUED EXPENSES ACCOUNTS PAYABLE(TRADE CREDIT)

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ACCRUED EXPENSES

Accrued expenses are periodically recurring short term liabilities such as wages accrued but not yet paid to employees and taxes owed but not yet paid.

There is no actual cost involved.

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ACCOUNTS PAYABLE

TRADE CREDIT IS A PRIMARY SAOURCE OF SPONTANEOUS FINANCING

IT ARISES SPONTANEOUSLY WITH THE FIRM’S PURCHASES

THE LOAN’S MATURITY DATE IS THE DATE THE FIRM IS REQUIRED TO PAY THE SUPPLERS’S BILL

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INVENTORY LOANS

INVENTORY LOANS ARE A SOURCE OF SHORT TERM SECURED CREDIT.AMOUNT DEPENDS ON THE MARKETABILITY AND LIFE OF THE INVENTORYTHE MOST POPULAR METHODS BY WHICH INVENTORY CAN BE USED TO SECURE FINANACING ARE:- FLOATING INVENTORY LINES TRUST RECEIPT INVENTORY WAREHOUSE RECEIPT LOAN

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FLOATING INVENTORY LIENS

FLOATING INVENTORY LIENS ARE MADE BY LENDERS AND SECURED BY A CLAIM ON INVENTORY ITEMS

INTEREST CHARGED ON FLOATING LIEN IS 3 TO 5 PERCENT ABOVE THE PRIME LENDING RATE

THE BORROWING FIRM MAINTAINS THE PHYSICAL POSSESSION AND CONTROL OF THE INVENTORIES

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TRUST RECEIPT INVENTORY

THE LENDER ADVANCES 80 TO100% OF THE COST OF SALABLE INVENTORY LOANS ARE OFTEN SECURED BY A NOTE AND A TRUST RECEIPT TRUST RECEIPT IS A LEGAL PAPER WHICH IS USED FOR SERIAL NUMBERED MERCHANDAISE INVENTORY CANNOT BE SOLD WITHOUT THE LENDER’S PERMISSION THE INTEREST CHARGE IS GENERALLY 2 PERCENT OR MORE ABOVE THE PRIME RATE

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WAREHOUSE RECEIPT LOAN

A WAREHOUSE RECIPT LOAN IS AN ARRANGEMENT WHEREBY THE LENDER RECEIVES CONTROL OF THE PLEDGED COLLATERALGENERALLY 75 TO 90 PERCENT OF THE COLLATERAL’S VALUE IS ADVANCED TO THE BORROWER

BANKS ALSO TAKE COMMODOTIES AS SECURITY BY LENDING MONEY ON A WAREHOUSE RECEIPT.

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