Managing Short Term Liabilities

Any liability originally scheduled for repayment within one year. Short Term Debt (STD) is riskier than Long Term Debt(LTD) STD less expensive than LTD.

Sources of ST Financing (1) Accruals Continually recurring short term liabilities; liabilities such as wages and taxes that increase spontaneously with operations. Firms operation increase Accruals may increase Free of cost -- No explicit interest Control little Wage custom fixed by economic custom

(2) Trade Credit The credit created when one firm buys on credit from another firm. Largest single category of STD Spontaneous source Formalities Minimum Time - short May free of cost Marketing strategy Collateral Free Trade Credit Credit received during the discount Period. Costly Trade Credit Trade taken in excess of free TC, whose cost is equal to the discount lost

(3) Short Term Bank Loan Commercial banks ,whose loans generally appear on firms Balance Sheets as Notes payable, are second in importance to Trade Credit as a source of short term financing. - Non spontaneous sources of Fund - Maturity Short term 90 days Max. less than 1 year Promissory Note : A document specify the terms and conditions of a loan, including the amount, interest rate and payment schedule, collateral others terms and conditions. Compensating Balance : A minimum checking account balance that a firm must maintain with a bank to borrow funds. Generally 10 to 20 percent of the amount of loan outstanding.

Line of Credit : An arrangement in which a bank agrees to lend up to a specified maximum amount of funds during a designated period. -Bank may provide not mandatory depends on availability of fund -Firms may use the facility not mandatory -Commitment fee not necessary to pay

Revolving Line of Credit : A formal , committed line of credit extended by a bank or other lending institution.
-When a Line of credit is guaranteed , it is called a RLC -Bank has a legal obligation to honor a RLC -Interest must have to pay on loan amount -Commitment fee must have to pay on the unused balance -Firms may use - not mandatory

# Factors to be considered to Choose a Bank I . Willingness to Assume Risk - Different basic policy towards risk - Conservative or Relaxed Lending Policy - Personality of officer - Deposit growing liberal credit policy - Large bank Diversification more- less risky

ii. Advice and counsel -Early/Formative stage - Providing advice -Specified Department -Valuable advice to customer
iii. Loyalty to customers -Support activities at bad time -Degree of loyalty

iv. Maximum loan size - Banking Rules - Govt. Regulation v. Specialization -Larger bank - Dept. More Agriculture, Real Estate, Farm loan

vi. Other Services -Cash Management - Foreign Exchange

(3) Commercial Paper Commercial paper is a type of unsecured promissory note issued by large, well reputed , strong firms .

Purpose : Deficit Financing Issuer : Well reputed business firm Investors : Business Firms Finance Companies Insurance Companies Individual Pension Fund
Maturity : One to Nine Months, Average 5 months Denomination : In USA $ 100000 Cost : Depends on supply and demand

# Use of Security in Short Term Financing :

Secured loan : A loan backed by collateral, for STL may be-inventory,receivables or both. Land,buildings,equipment inventory,marketable securities,accounts receivables.

Unsecured loan: Loan not backed by collateral

# Accounts Receivable Financing ARF involves either the pledging of receivables or the selling of receivables. Pledging receivables : Using ACR as a collateral for a loan. Recourse : The lender can seek payment from the borrowing firm when receivables account used to secure a loan are un collectable. Factoring : The outright sale of receivables. - Purchase of accounts receivable by the lender (factor) - buyer of the goods is notified of the transfer and is asked to make payment directly to the lending institution.