Sources of Short-Term Financing C H A P T E R E I G H T

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1 Sources of -Term Financing C H A P T E R E I G H T

2 Figure 8-1 Structure of corporate debt, 1998 PPT % 30% 25% 20% 15% 10% 5% 0% Accounts payable Bank loans Other short term loans term paper Bonds Mortgages Source: Statistics Canada, Financial Statistics for Enterprises, Catalogue XPB, 3rd quarter 1998

3 Figure 8-2 Prime interest rate movements PPT 8-2

4 Figure 8-3 Corporate short-term paper outstanding PPT $ billions Bankers' acceptances Commercial paper Source: Bank of Canada Review, Autumn

5 Figure 8-4 Comparison of commercial paper rate to bank prime rate* PPT 8-4 percentage day commercial pa per Prime * Average interest rate at December 31

6 Chapter 8 - Outline LT 8-1 Sources of -Term Financing Trade Credit Net Credit Position Types of Bank Loans Corporate and Foreign Borrowing Accounts Receivable Financing Inventory Financing Longer-term Loans

7 Sources of -Term Financing LT 8-2 There are various sources of short-term funds available to a firm: Trade Credit from Suppliers Bank Loans Corporate Promissory Notes Bankers Acceptances Foreign Borrowing Loans Against Receivables and Inventory

8 Trade Credit from Suppliers LT 8-3 The largest source of short-term financing for a firm-over 50% It is usually a day grace period before a bill is due A cash discount is often given if payment is made within a specified time Ex., 2/10 net 30 means a 2% discount is given if paid in 10 days; if not, the full amount is due in 30 days

9 Net Credit Position LT 8-4 Net Credit Position: a firm s Accounts Receivable (A/R) minus its Accounts Payable (A/P) if A/R is greater than A/P, it is a net provider of trade credit (positive number) if A/P is greater than A/R, it is a net user of trade credit (negative number) larger firms tend to be net providers of trade credit, while smaller firms are net users

10 Types of -term Bank Loans LT 8-5 Line of Credit: company is able to draw upon a yearly borrowing facility arranged in advance revolving credits are for periods longer than 1 year general purpose loans Transaction Loan: short-term loan for a specific purpose Compensating Balance: when a bank requires a minimum average account balance in order to qualify for a loan can be thought of as a form of collateral less common than in the past

11 Corporate and Foreign Borrowing LT 8-6 Commercial Paper: a short-term unsecured promissory note in minimum units of $50,000 sold (at a discount) by finance companies, other large corporations cheaper than bank loans total amount of commercial paper outstanding has increased greatly in recent years Bankers Acceptances to finance goods in transit (particularly imports) sold at a discount Eurodollar Loans: loans from foreign banks denominated in Canadian dollars are called Eurodollar loans (U.S Eurodollars predominate) foreign interest rates may be lower

12 Accounts Receivable Financing LT 8-7 A/R financing includes 3 choices: pledging accounts receivable as collateral for a loan an outright sale (factoring) of receivables to a factoring company Asset-backed Securities: sale of receivables by large corporations in public offerings Tends to be a relatively expensive source of financing

13 Inventory Financing LT 8-8 Inventory may be assigned as collateral security against an operating loan For example, in a Trust Receipt or Floor Planning loan is based upon serial numbers on product when goods are sold, loan is repaid used by auto dealers, industrial equipment dealers, television and home appliance dealers

14 Longer-term Loans LT 8-9 Term Loan (Instalment Loan): loan for 1-7 years interest rate may be fixed or change with prime rate repaid in monthly or quarterly instalments used to buy capital assets (ex; automobiles, property)