FINANCIAL

MANAGEMENT
GROUP 5
SHORT TERM FINANCING
 SHORT-TERM FINANCING

It means taking out a loan to make a purchase, usually with a loan

term of less than one year. There are many different types of short-
term financing, the most common of which are “Buy Now, Pay
Later,” “Unsecured Personal Loans,” and “Payday Loans.”

There are many different types of Short-Term Financing, the most

common of which are: Buy Now, Pay Later, Unsecured Personal
Loans, and Payday Loans.
BUY NOW, PAY LATER

Many stores offer Buy Now, Pay Later loans, both in person and
online. With this type of financing, you can typically walk out of
the store with your purchase immediately, then pay for it later
either through installments or through monthly payments that
begin after a set period of time. These loans can be attractive if
you are low on cash since they allow for instant gratification
UNSECURED PERSONAL LOANS

Unsecured Personal Loans refer to any loan you take out without
providing collateral. In fact, credit cards are one type of
unsecured personal loans. You can also go to your bank or
another financial institution for a one-time unsecured personal
loan. This works similarly to taking a cash advance from your
credit card.
PAYDAY LOANS

Payday loans are the riskiest type of loan you can take. These loans
are typically offered as a “bridge” between an expense (such as
rent) and your next paycheck, usually with term lengths of less than
1 month. These loans can be either unsecured or secured. Secured
payday loans typically require a car title as collateral. This means
that if you fail to pay back the payday loan, your car could be
seized and auctioned off to pay for your debt.
FINANCING
FINANCING

Financing means asking any financial institution (bank, credit

union, finance company) or another person to lend you money
that you promise to repay at some point in the future. In other
words, when you buy a car, if you do not have all the cash for it,
the dealer will look for a bank that will finance it for you.
FINANCE IS MAINLY DIVIDED BY 3
CATEGORIES:
1. Public Finance
The federal government helps prevent market failure by overseeing the
allocation of resources, distribution of income, and stabilization of the
economy. Regular funding for these programs is secured mostly through
taxation. Borrowing from banks, insurance companies, and other
governments and earning dividends from its companies also help finance
the federal government.
FINANCE IS MAINLY DIVIDED BY 3
CATEGORIES:
2. Corporate Finance
Businesses obtain financing through a variety of means, ranging
from equity investments to credit arrangements. A firm might take
out a loan from a bank or arrange for a line of credit. Acquiring
and managing debt properly can help a company expand and
become more profitable.
FINANCE IS MAINLY DIVIDED BY 3
CATEGORIES:
3. Personal Finance
Personal financial planning generally involves analyzing an
individual's or a family's current financial position, predicting short-
term, and long-term needs, and executing a plan to fulfill those needs
within individual financial constraints. Personal finance depends
largely on one's earnings, living requirements, and individual goals
and desires.
THE MAIN SOURCES OF SHORT-
TERM FINANCING
TRADE CREDIT

A firm customarily buys its supplies and materials on credit from

other firms, recording the debt as an account payable. This trade
credit, as it is commonly called, is the largest single category of
short-term credit.
There are two types of Trade Credit:
Trade Receivables and Trade Payables
2 TYPES OF TRADE CREDIT

Trade Receivables
Trade receivables are defined as the amount owed to a business
by its customers following the sale of goods or services on credit.
Also known as accounts receivable, trade receivables are
classified as current assets on the balance sheet.
2 TYPES OF TRADE CREDIT

Trade Payables
Trade payables are short-term expenses incurred by businesses
when they use products or services from a third-party vendor or
supplier to deliver their products to their customer.
COMMERCIAL BANK LOANS

Commercial bank lending appears on the balance sheet as notes

payable and is second in importance to trade credit as a source of
short-term financing. Banks occupy a pivotal position in the
short-term and intermediate-term money markets. As a firm’s
financing needs grow, banks are called upon to provide additional
funds.
COMMERCIAL PAPER

Commercial paper is an unsecured, short-term debt instrument

issued by corporations. It’s typically used to finance short-term
liabilities such as payroll, accounts payable, and inventories.
Commercial paper is usually issued at a discount from face value.
SECURED LOANS

Most short-term business loans are unsecured, which means that

an established company’s credit rating qualifies it for a loan. It is
ordinarily better to borrow on an unsecured basis, but frequently a
borrower’s credit rating is not strong enough to justify an
unsecured loan. The most common types of collateral used for
short-term credit are accounts receivable and inventories.
TRADE CREDIT
TRADE CREDIT

Trade credit means many things but the simplest definition is an

arrangement to buy goods and/or services on account without
making immediate cash or cheque payments. Trade credit is a
helpful tool for growing businesses, when favourable terms are
agreed with a business’s supplier.
TRADE CREDIT

Trade credit is a business-to-business (B2B) agreement in which a

customer can purchase goods without paying cash up front, and
paying the supplier at a later scheduled date. Usually, businesses
that operate with trade credits will give buyers 30, 60, or 90 days
to pay, with the transaction recorded through an invoice.
MAINLY THREE TRADE CREDIT TYPES:

1. Open Account
Smaller businesses often don’t sign a formal agreement with their
customers while extending trade credit. Such a system is called an
open account.
MAINLY THREE TRADE CREDIT TYPES:

2. Trade Acceptance
When the seller and buyer have a formal agreement for extending
and receiving trade credit before the sale, it is called a trade
acceptance. Before the seller ships the goods or provides their
services, the buyer must sign the agreement.
MAINLY THREE TRADE CREDIT TYPES:

3. Promissory note
It is a debt instrument where the buyer promises to pay a
particular amount before the due date to the seller. It is also a
formal agreement between the two parties before the sale goes
through.
BENEFIT OF TRADE CREDIT

Using trade credit allows your business to be more flexible,

adapting to market demands and seasonal variations opens in new
window so that you have a constant supply of goods even when
your finances aren’t stable.
CONSUMER CREDIT
OR
CUSTOMER CREDIT
CONSUMER CREDIT

Consumer credit refers to the credit facility financial institutions

provide to their customers for purchasing goods and services.
Common examples are credit card payments, consumer durables
loans, and student loans.
TYPES OF CONSUMER CREDIT

The well-known types are revolving credit and installment credit.

This classification is based on various factors like repayment
structure and collateral.
REVOLVING CREDIT

Generally, a revolving credit account user can spend any amount

at any time at their discretion but not cross the predefined upper
limit. There is a repeating spending limit and duration. For
example, in the case of credit cards, users can utilize the
repeating credit facility
INSTALLMENT CREDIT

Installment credit occurs when the customer takes banks or other

financial institutions’ help to get a fixed amount to buy
particular consumer goods and services.
PROS OF CUSTOMER CREDIT

Financial freedom & flexibility: The credit services offer the

flexibility of options. Consumers can purchase per choice within
their credit limit even if they don’t have enough income at present
but have earning potential.
PROS OF CUSTOMER CREDIT

Credit card reward programs: Credit card companies lure or

maintain customers with reward systems like cashback offers,
reward points, and miles. Customers may choose credit or reward
cards over cash or debit payments to earn reward points.
PROS OF CUSTOMER CREDIT

Enhance credit score: If the customer is disciplined with credit

card payments, it gives opportunities to build a good credit
history.
CONS OF CUSTOMER CREDIT

Credit card debt: Credit card misuse and overspending lead to

the racking up of credit card debts.
CONS OF CUSTOMER CREDIT

Compulsive buying: Easy availability of credit intensifies

compulsive buying. When an individual has a credit card with
them, a specific tool, it fuels their temptation to purchase more
than is required. As a result, most people buy things in bulk and
regret them later.
CONS OF CUSTOMER CREDIT

Financing cost: It comes with a cost in the form of interest or fee

payment.
CONS OF CUSTOMER CREDIT

Interest rates and penalties: It is the most distressing part. It

happens if the consumer defaults on the payment. In that case,
they are usually penalized with a higher rate of interest which
becomes very hard to settle and certainly affects the user’s credit
score.
CUSTOMER ADVANCES

Customer advances may be defined as the part of payment made in advance

by the customer to the enterprise for the procurement of goods and services
in the future. It is also called Cash before Delivery (CBD). The customers
pay the amount of advance, when they place the order of goods and services
required by them. The method of procuring goods and services depends on
the characteristic and value of the product. Customer advances allow
customers to defer their payment for some time and fulfill their other
obligation on priority.
ADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:

1. Free from Interest Burden: It implies that the

enterprise does not require paying any interest on
customer advances.
ADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:

2. No Security Required: It implies that the

enterprise does not need to keep any security to
raise customer advances.
ADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:

3. No Repayment Obligation: It refers to the fact

that the enterprise is free to decide whether to
refund money, if the order is cancelled by
customers.
THE DISADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:
1. Limited to Selected Enterprise: It refers to the
fact that the benefits of customer advances can be
availed only by those enterprises, which have
goodwill in the market.
THE DISADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:
2. Limited Period Offer: Limited period offer
implies that the customer advances can be availed
only for limited period of time. The allotted time
for the advances and delivery of goods and
services is fixed and cannot be extended.
THE DISADVANTAGES OF CUSTOMER
ADVANCES ARE AS FOLLOWS:
3. Limited Amount of Advance: It refers to the fact that
customers made only a part of payment, which may not
fulfill the fund requirement of the enterprise. In addition,
the amount of advance is proportional to the value of the
product; therefore, it may vary from product to product.
INSTALLMENT CREDIT
 INSTALLMENT CREDIT

• Installment credit is also called “Installment Plan”

• In business credit that is granted on condition of it’s repayment of
regular intervals or installments over a specific of time until paid in
full.
• It is also a loan for a fixed of money that a borrowers agrees to
make a set of number of a monthly payment at a specific amount.
 TYPICAL INSTALLMENT LOANS INCLUDE:

Mortgage
- A mortgage is a loan used to buy a home.
Auto loans
- Auto loans that cover the cost of a new or previously owned car.
Student loans
- that cover educational costs, including tuition, room and board..
Personal loan
- A personal loan can be used for many purposes, including consolidating debt or
financing a home renovation.
 THE FACTORS DETERMINE YOUR
INSTALLMENT CREDIT LOAN ELIGIBILITY:
- Your Age
- Ability to Repay
- State of Residence
- Credit Score
 PROS OF INSTALLMENT CREDIT

1. The most significant advantage of installment credit is that you

know what your monthly payment amount will be. This can, in turn,
help you plan your budget accordingly to avoid missing even a
single payment.
 PROS OF INSTALLMENT CREDIT

2. An installment credit makes it easy to cover significant expenses,

finance your big purchases, and pay later in multiple installments.
These payments are usually affordable and manageable without
burdening your budget.
3. By getting an installment loan and making regular payments, there is
a possibility to build or rebuild your credit scores. You can check with
your lender to ensure that your on-time payments are being reported to
the credit bureaus
 CONS OF INSTALLMENT CREDIT

1. an installment credit only allows you to borrow a set amount from

your loan eligibility amount. You will have to apply and fulfill the
requirements for another loan if you need additional funds.
2. In the case of long repayment terms, you might feel a fierce
financial commitment to make regular payments for an extended
period. If you think you can pay off your loan early, you can check
whether your lender charges any prepayment penalties or not.
ACCOUNTS RECEIVABLE
FINANCING
 ACCOUNTS RECEIVABLE FINANCING

Accounts receivable financing allows companies to receive early

payment on their outstanding invoices. A company using accounts
receivable financing commits some, or all, of its outstanding
invoices to a funder for early payment, in return for a fee.
 THE THREE PRIMARY TYPES OF
RECEIVABLE FINANCE

Asset-based lending (ABL): Also known as a business line of credit

or traditional commercial lending, asset-based lending is an on-
balance sheet technique and typically comes with significant fees.
Companies commit the majority of their receivables to the program
and have limited flexibility about which receivables are committed.
 THE THREE PRIMARY TYPES OF
RECEIVABLE FINANCE
Traditional factoring: In factoring, different than reverse factoring, a
business sells its accounts receivable to a funder – but the initial
payment is for less than the full amount of the receivable. For example,
a company may receive early payment for 80 percent of the invoice
amount minus processing fees. Compared to asset-based lending,
companies have more flexibility in choosing which receivables to
trade, but funder fees can be high and credit lines may be smaller. As
with ABL, any factored receivables are recorded on the company’s
balance sheet as outstanding debt.
 THE THREE PRIMARY TYPES OF
RECEIVABLE FINANCE
Selective receivables finance: Selective accounts receivables
finance allows companies to pick and choose which receivables to
advance for early payment. Additionally, selective receivables
finance enables companies to secure advanced payment for the full
amount of each receivable. Financing rates are typically lower than
other alternatives, and this method may not count as debt based on
the program structure. Because selective receivables finance stays off
the balance sheet, it does not impact debt ratios or other outstanding
lines of credit.
 WHY IS SELECTIVE RECEIVABLES FINANCE
OFTEN A PREFERRED OPTION?
Compared to asset-based lending and traditional factoring, selective
receivables finance delivers cash flow gains more efficiently and
often at lower costs and risks. Here’s why:
Not counted as debt: When structured properly, selective
receivables finance stays off a company’s balance sheet and therefore
has no impact on outstanding loans or future requirements for lines
of credit and similar funding.
 WHY IS SELECTIVE RECEIVABLES FINANCE
OFTEN A PREFERRED OPTION?
Companies choose which receivables are paid early: Companies can
choose which receivables they want to submit for early payment rather
than offer up their entire rolling book of receivables. As a result, they can
more closely control their ability to trade off cash flow gains and funding
costs.
 WHY IS SELECTIVE RECEIVABLES FINANCE
OFTEN A PREFERRED OPTION?
Flexibility to choose when to participate: Selective receivables
finance allows companies to participate only when they need to. This
is key for businesses that experience seasonal demand or during
periods of economic volatility.
 WHY IS SELECTIVE RECEIVABLES FINANCE
OFTEN A PREFERRED OPTION?
Ability to tap into multiple funding sources: Unlike other options,
selective receivables finance allows companies to incorporate multiple
funders into a program. This reduces the risks inherent in relying on a
single financial institution (including when a bank will restrict liquidity
due to changes in their own circumstances).
 WHY IS SELECTIVE RECEIVABLES FINANCE
OFTEN A PREFERRED OPTION?

More favorable pricing: By incorporating multiple funding sources,

selective receivables finance enhances price competition.
 HOW DOES SELECTIVE RECEIVABLES
FINANCE WORK?
The most successful selective receivables finance programs are
powered by state-of-the-art software platforms that allow companies to
sell their invoices for early payment well before the actual due date
and, in most cases, without any involvement from or disclosure to their
customers. Facilitating a true sale of receivables, not factoring or a
loan, the platform automatically handles all transactions across
multiple customers and provides companies with additional cash flow
in different countries and currencies.
LONG TERM SOURCES OF
FINANCE
 LONG TERM SOURCE OF FINANCE

Long-term financing means financing by loan or borrowing for more

than one year by issuing equity shares, a form of debt financing,
long-term loans, leases, or bonds. It is usually done for big projects,
financing, and company expansion. Such long-term financing is
generally of high amount.
 IMPORTANCE OF LONG TERM FINANCE

Long-term finance contributes to faster growth, greater welfare, shared

prosperity, and enduring stability in two important ways:
• Reducing rollover risks for borrowers.
• Increasing the availability of long-term financial instruments
The term of the financing reflects the risk-sharing contract between providers
and users of finance. Long-term finance shifts risk to the providers because they
have to bear the fluctuations in the probability of default and other changing
conditions in financial markets, such as interest rate risk.
 5 SOURCES OF LONG TERM FINANCING

EQUITY CAPITAL
Equity capital is funds paid into a business by investors in exchange
for common stock or preferred stock. The company may either raise
funds from the market via IPO (initial public offering) or opt for a
private investor to take a substantial stake in the company.
 5 SOURCES OF LONG TERM FINANCING

PREFERENCE CAPITAL
Preference Share Capital is the funds generated by a company
through issuing preference shares (also known as Preference stock).
Preference Shareholders have the first right to receive dividends
even before equity shareholders.
 5 SOURCES OF LONG TERM FINANCING

DEBENTURES
Is a loan taken from the public by issuing debenture certificates
under the company’s common seal. In that case, it takes the debt IPO
route where all the public subscribing to it gets allotted certificates
and are the company’s creditors.
 5 SOURCES OF LONG TERM FINANCING

TERM LOANS
Banks or financial institutions generally give them for more than one
year. They have mostly secured loans offered by banks against strong
collaterals provided by the company in the form of land and
building, machinery, and other fixed assets.
 5 SOURCES OF LONG TERM FINANCING

RETAINED EARNINGS
Retained earnings are the amount of profit a company has left over
after paying all its direct costs, indirect costs, income taxes and its
dividends to shareholders.
 EXAMPLES OF LONG TERM FINANCE

• Amazon raised $54 million via the IPO route to meet the long-
term funding needs of the company in 1997.

• Apple raises $6.5 billion in debt via bonds.

 ADVANTAGES OF LONG TERM FINANCE

• Align specifically to the long-term capital objectives of the

company
• Effectively manages the asset-liability position of the organization
• Flexible repayment mechanism
• Debt diversification
• Growth and expansion
 LIMITATION OF LONG TERM FINANCE

• The regulators lay down strict regulations for the repayment of interest and
principal amounts.
• High gearing on the company may affect the valuations and future
fundraising.
• Stringent provisions under the IBC Code for non-repayment of
the debt obligations may lead to bankruptcy.
• Monitoring the financial covenants in the term sheet is very
difficult.