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Presented by:
Jana Aming
Edsel Tiu
John Carlos Wee
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FLOW OF PRESENTATION
INTRODUCTION
FINANCING STRATEGIES
SHORT-TERM CREDITADVANTAGES AND DISADVANTAGES
OF SHORT-TERM FINANCING
SOURCES OF SHORT-TERMFINANCING
FACTORS IN SELECTING SOURCE OF
SHORT-TERM FUNDS
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FLOW OF PRESENTATION
UNSECURED SOURCES OF SHORT-
TERM CREDIT
SPONTANEOUS SOURCES
TRADE CREDIT
ACCRUALS
NEGOTIATED SOURCES
BANK LOANS SINGLE PAYMENT NOTE
LINE OF CREDIT
REVOLVING CREDIT AGREEMENT
COMMERCIAL PAPER
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FLOW OF PRESENTATION
SECURED SOURCES OF SHORT-TERM
LOANS
ACCOUNTS RECEIVABLE FINANCING
PLEDGING/ASSIGNMENT
FACTORING
INVENTORY FINANCING
BLANKET (FLOATING) INVENTORY LIEN TRUST RECEIPTS LOAN AND CHATTEL
MORTGAGE
WAREHOUSING RECEIPT LOANS
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INTRODUCTION
One of the most important decisions that
must be made with respect to working
capital management is how short-term
credits will be used to finance workingcapital.
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FINANCING STRATEGIES
Financing strategies of the company
usually depends on the financing needs
of the company.
Categories of Financing Needs of the
Company:
1. Permanent Need2. Seasonal Need
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FINANCING STRATEGIES
Alternative Short-Term Financing
Strategies/Policies
1. Aggressive Financing Strategy/Policy
2. Conservative Financing Strategy/Policy
3. Hedging (Self-Liquidating) Financing
Strategy/Policy
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SHORT-TERM CREDIT
Also called short-term/current liability,
this is any debt scheduled to mature
within one year or one operating period.
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ADVANTAGES AND
DISADVANTAGES OF SHORT-
TERM FINANCINGAdvantages1. Speed
2. Flexibility
3. Cost Associated to Short-Term
Financing vs. Long-Term Financing
Disadvantage
1. Risks Associated to Short-Term
Financing vs. Long-Term Financing
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SOURCES OF SHORT-TERM
FINANCING
Unsecured Credit Sources
Spontaneous Liabilities
Trade Credit
Accruals
Negotiated Sources
Bank Loans
Commercial Papers
Secured Credit Sources
Accounts Receivable Financing
Inventory Loans
FACTORS IN SELECTING
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FACTORS IN SELECTING
SOURCE OF SHORT-TERM
FUNDS1. The effective cost of credit.2. The availability of credit.
3. The influence of the use of a particular
credit source on the cost and
availability of other sources of
financing.
4. Any additional covenants or restrictions.
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Current Liabilities Management
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UNSECURED SOURCES OF
SHORT-TERM CREDIT
These include all those sources that
have their security only the lenders faith
in the ability of the borrower to repay the
funds when due. They are obtainedwithout pledging specific assets as
collateral.
Unsecured sources fall in two majorcategories:
1. Spontaneous Sources, and
2. Negotiated Sources.
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SPONTANEOUS SOURCES
These are short-term credits arising
from the normal course of business.
There are no interest costs attached to
these sources. However, they may havesome implicit costs.
Two major sources:1. Accounts Payable
2. Accruals
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TRADE CREDIT (ACCOUNTS
PAYABLE)
This is a debt arising from credit purchases
by a firm without issuing any formal note as
an evidence of the firms liability to its
supplier(s). It is considered as a primary source of
spontaneous financing because it arises
from ordinary business transaction.
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TRADE CREDIT TERMS
Cash on Delivery (COD) and Cash
Before Delivery (CBD)
Net Period
Without Discount
With Discount
Dating
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TRADE CREDIT FINANCING
Availing trade credits, technically, is not
discretionary financing strategy.
The discretionary portion of trade credit
financing lies on the period when thecompany pays its accounts payable.
Payment decisions:
1. Taking the cash discount.2. Payment at the last day of credit terms.
3. Stretching accounts payable.
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COST OF CREDIT TRADE
FINANCING
Without Cash Discount:
IMPLICIT COST: The difference
between the selling prices through cash
purchase and credit purchase. (If creditpurchases are stated higher than cash
purchase)
EXPLICIT COST: NONE
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COST OF CREDIT TRADE
FINANCING
With Cash Discount:
IMPLICIT COST: Annualized Cost of
Foregone Discount
EXPLICIT COST: NONE
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ADVANTAGES OF TRADE
CREDIT
Availability readily available; no need
for negotiation, unless required by the
supplier.
Flexibility payment can be madeanytime within the credit period and may
be stretched depending on the
negotiation with the supplier.
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ACCRUALS (ACCRUED
EXPENSES)
These are company liabilities for
services that have been provided for the
company but are not yet paid.
Common sources of accruals:
Labor (Salaries and Wages)
Taxes Interest
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ACCRUAL ACCOUNTS
FINANCING
Like trade credits, availing of accruals as
financing source is technically non-
discretionary in nature.
Also, only accruals controllable by thecompany may have discretionary
characteristics in this source of
financing. Taxes are controlled by the government (due
dates are set, usually 10-15 days after close
of each month.
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ACCRUAL ACCOUNTS
FINANCING
The most common source of accrual
accounts financing is the unpaid salaries
of employees.
The company may have the discretionon the period of payment for the
employees salary (e.g. monthly at the
end of each month, monthly at ten daysafter close of each month, every half a
month, etc.).
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COST OF ACCRUAL
FINANCING
IMPLICIT COST: NONE
EXPLICIT COST: NONE
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NEGOTIATED SOURCES
These are short-term credits arising
from the negotiation entered into by the
borrowing firm and the potential
creditors, usually banks and othercorporations, evidenced by a formal
note or some other documents.
Two major sources:
1. Bank Loans
2. Commercial Papers
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COMMERCIAL BANK LOANS
These are short-term business creditprovided by commercial banks, requiring
the borrower to sign a promissory note
to acknowledge the amount of debt.
Types of Short-Term, Unsecured Bank
Loans:1. Single-Payment Notes
2. Lines of Credit
3. Revolving Credit Agreements
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SINGLE-PAYMENT NOTE
This is a short-term, one-time loan made
to a borrower who needs funds for a
specific purpose for a short period.
Resulting instrument: A Note stating the
terms of the loan, including the maturity
period of the loan and the interest rate,usually stated on a per annumbasis.
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LINE OF CREDIT
This is an informal agreement between
a bank and a borrower-company
specifying the maximum amount of
unsecured short-term borrowing thebank will make available to the firm over
a period of time, usually one (1) year
and subject to one (1) year renewals.
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LINE OF CREDIT
Some Restrictions/Conditions:
Operating-Change Restrictions contractual
restrictions that a bank may impose on a
firms financial condition or operations aspart of the agreement
Compensating Balances a required
account balance equal to a certain
percentage of the amount borrowed from thebank under the same agreement.
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LINE OF CREDIT
Some Restrictions/Conditions:
Annual Cleanup the requirement that for a
certain number of days or months during the
year, borrowers under a line of credit carry azero-loan balance.
Interest Rate on this type of agreement
is usually stated as a floating rate the
prime rate plus a premium.
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REVOLVING CREDIT
AGREEMENT
This is a formal, legal commitment by
the bank to extend credit up to a stated
maximum amount for a given period of
time.
Due to the features of this type of loan,
the bank usually charges commitmentfee on an amount unused by the
borrower.
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COST OF BANK LOANS
EXPLICIT COST: Effective Interest on
the Loan, plus add-ons (Premium,
Compensating Balances, etc.)
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COMPUTING EFFECTIVE
INTEREST RATES
Without Compensating Balance:
Simple Interest:
Discount Interest:
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COMPUTING EFFECTIVE
INTEREST RATES
With Compensating Balance:
Simple Interest:
OR
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COMPUTING EFFECTIVE
INTEREST RATES
With Compensating Balance:
Discount Interest:
OR
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COMMERCIAL PAPER
This is an unsecured short-term
promissory note issued by large, strong
credit rating companies to other
companies and institutions, such as trustfunds, banks and insurance companies.
Commercial papers can be obtainedthrough the money market (a type of
financial market for trading of short-term
securities).
ADVANTAGES AND
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ADVANTAGES ANDDISADVANTAGES OF
COMMERCIAL PAPERSADVANTAGES: Less costly than trade credit and bank
loans.
Not subject to possible restrictive
covenants contained in most bank loans.
ADVANTAGES AND
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ADVANTAGES ANDDISADVANTAGES OF
COMMERCIAL PAPERSDISADVANTAGES: Commercial papers have fixed maturity
rate, exposing it to liquidity risk (the risk of
non-conversion of the security into cashat maturity).
Commercial papers have limited access
and user availability.
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COST OF COMMERCIAL
PAPER
EXPLICIT COST: Effective Interest Cost
plus Issue Cost
Computation:
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Current Liabilities Management
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SECURED SOURCES OF
SHORT-TERM LOANS
These are short-term loans that use
some specific assets as collateral in
securing the loan.
Assets typically used as collateral in
secured short-term credits:
1. Accounts Receivable, and2. Inventory (Merchandise/Finished Goods).
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ACCOUNTS RECEIVABLE
FINANCING
Accounts Receivables (Trade Receivables)
are financial assets of a company arising
from the sale of companys goods and
services to customers. They represent acontractual right of the company to receive
cash from the customer.
The use of accounts receivable in obtainingloans are considered to be common to
most enterprises because of its being
attractive to most lenders due to its
liquidity.
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ACCOUNTS RECEIVABLE
FINANCING
Two means of using accounts receivable in
obtaining short term financing:
1. Pledging or Assignment of Accounts
Receivable2. Factoring of Accounts Receivable
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PLEDGING OR ASSIGNMENT
OF ACCOUNTS RECEIVABLES
In this form of accounts receivable
financing, certain amount of accounts
receivable are pledged or assigned as a
collateral to a loan. The Pledging Process:
1. Selection and evaluation of accounts
receivables used as collateral;
2. Adjustment of receivable value for
allowances, usually on a fixed percentage;
3. Determination of loan amount.
G G O SS G
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PLEDGING OR ASSIGNMENT
OF ACCOUNTS RECEIVABLES
Pledging can be made on a notification
or non-notification basis.
In a non-notification basis, the borrower
continues to collect from the customers theamount of the receivable and remits the
same to the lender.
In a notification basis, the borrower notifies
the customers to remit their payment directlyto the lender.
ADVANTAGE AND
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ADVANTAGE ANDDISADVANTAGE OF
PLEDGING/ASSIGNMENTAdvantage: Flexibility in the use of accounts receivable
as collateral
Disadvantage
Relative higher cost compared with other
short-term financing sources.
COST OF PLEDGING
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COST OF PLEDGING
ACCOUNTS RECEIVABLE
EXPLICIT COST: Effective Cost
Computation:
FACTORING OF ACCOUNTS
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FACTORING OF ACCOUNTS
RECEIVABLES
This form of accounts receivable
financing involves the outright sale of
accounts receivable, usually at a
discount, to a finance company knownas a factor.
The Factoring Process:
1. Selection and evaluation of accountsreceivables used as collateral;
2. Determination of loan amount, considering
retention of certain amount for any
allowances and returns.
FACTORING OF ACCOUNTS
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FACTORING OF ACCOUNTS
RECEIVABLES
Factoring of accounts receivable are
usually done on a notification basis and
are oftentimes made on a nonrecourse,
thus substantial transfer of risks andreturns of ownership to the receivable is
made.
COST OF FACTORING
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COST OF FACTORING
ACCOUNTS RECEIVABLE
EXPLICIT COST: Effective Cost
Computation:
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INVENTORY FINANCING
Inventories are goods or items which are
held for sale in the ordinary course of
business, or those which are in the
process of production for such sale, orthose materials or supplies that are to
be consumed in the production process
or in the rendering of services. They
also encompass those goods purchased
and are held for resale by the company.
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INVENTORY FINANCING
Because of the marketability of
inventories and their market value being
usually higher than the book value,
inventories are also desirable forms ofcollateral for loans.
However, not all types of inventories
may be used as collateral. The best inventory items to be pledged
as collateral for loans are those that are
highly marketable and generic in nature.
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INVENTORY FINANCING
Forms of Inventory Financing:
Blanket (Floating) Inventory Lien
Trust Receipt Agreements/ Chattel Mortgage
Warehouse Receipt Loans
BLANKET/FLOATING
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BLANKET/FLOATING
INVENTORY LIEN
Under this form of inventory loan, the
lender has a general claim over the
inventory items held by the borrower,
thus no specific item is assigned to theloan.
The borrower, in this type of inventory
loan, retains full control over theinventory.
TRUST RECEIPTS LOAN AND
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TRUST RECEIPTS LOAN AND
CHATTEL MORTGAGE
Under the trust receipt loan and chattel
mortgage, certain inventory items are
specifically identified and are used as
collateral for loan. Oftentimes, theseinventory items are identified via serial
numbers. The items used as collateral
are still being held by the borrower.
TRUST RECEIPTS LOAN AND
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TRUST RECEIPTS LOAN AND
CHATTEL MORTGAGE
In the chattel mortgage, the sale of the
inventory items may not be done unless
consented by the lender.
In the trust receipts loan, a trust receipt isgenerated and is being used in selling of the
items. Thus, there is general permission on
the sale of the inventory items by theborrower in trust of the lender, the proceeds
from the sale of which should be remitted by
the former to the latter.
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WAREHOUSE RECEIPT LOAN
This is an arrangement whereby the
lender receives full physical and legal
control of the identified inventory
collateral, which is stored under the careof a warehousing company serving as
an agent of the lender.
Two types of warehousing agreement: Terminal Warehouse Receipt Loan
Field Warehouse Receipt Loan
COST OF INVENTORY
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COST OF INVENTORY
FINANCING
EXPLICIT COST: Effective Cost
Computation:
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REFERENCES:
BOOKS:
Cabrera, Ma. Elenita, FINANCIAL MAANGEMENT, PART
I, 2012 Edition, Conanan Educational Supply, Manila
E-BOOKS:Gitman, Lawrence J., PRINCIPLES OF MANAGERIAL
FINANCE, 10th Edition
Brigham, Eugene F. and Houston, Joel F.,
FUNDAMENTALS OF FINANCIAL MANAGEMENT,10th Edition
Van Horne, James C., FINANCIAL MANAGEMENT AND
POLICY, 12th Edition
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