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SOURCES OF SHORT-TERM

CAPITAL

The total business finance function is composed of three segments: (1) short-term financing, (2) intermediate-term financing, and (3) long-term financing.

Short-term financing deals with the demand for and supply of short-term funds which may either be secured or unsecured.

If the credit term is 5/5, net 60 (which means a 5% discount is deducted from invoice price if settled within five days, otherwise the full amount is due in 60days), the annual cost is computed as follows:

In general, secured loans are granted for the following purposes:

(1) accounts receivable financing, and (2) inventory financing. An example of accounts receivables financing is the “Receivable Financing Program/Post Dated Check Financing” scheme of the PCI Bank. This type of short-term loan provides advantages to manufacturers and distributors through the assignment of receivables.

SOURCES OF SHORT-

TERM CAPITAL

Sales Finance Companies

Sales finance companies are firms specializing in the purchase from retailers of the installment receivables arising out of retail sales of automobiles, house hold appliances, industrial equipment, farm equipment, and other durable goods sold on the installment payment plan. Some sales finance companies operate in the Philippines. Among them are the following:

1.MB Finance – which provides financing for brand-new and used vehicles, working capital, car repairs, expensive appliances, and personal computers.

2.BA Finance Corporation – which provides car loans;

3.BPI Family Bank – which provides financing for the following purposes:

•To buy a brand new or secondhand car

•To refinance existing car loans

•To borrow cash with car or other vehicles as collateral

There are three major types of finance companies. They are the following:

1.Sale finance companies;

2.Business or commercial finance companies ; and

3.Personal finance companies.

Finance Companies

Finance companies are those which are engaged in making short and intermediate term installment loans to consumers, factors of finance business receivables, and finance the sale of business and farm equipment. Funds are raised by finance companies, just like any other corporation, by issuing stocks and bonds, borrowing from the banks, and selling their commercial paper.

Commercial Paper Houses

A commercial paper is a short term promissory note, generally unsecured, which is sold through commercial paper dealers or directly to investors. Commercial papers are issued by finance companies and business firms that borrow funds in the money market.

Factors

Factors perform the financial service known as factoring, which consist of the purchase of accounts receivable outright without recourse to the seller for credit losses.

Business or Commercial Finance Companies

This lends directly to a wide variety of businesses, mainly of small and medium size. Short term loans are granted by this type of finance companies against the security of assigned accounts receivable, inventory, and equipment.

When using accounts receivable as collateral, the loan arrangement may fall under any of the following:

1.Non-notification plan

2.Notification plan

Under the non notification plan, the debtors of the borrowing firm are not aware that their accounts have been pledged as collateral for a loan from finance company. When the debtors are informed, however, the plan falls under notification plan.

The four components perform different functions. The functional differences, however, have been reduced by reforms in the Philippine banking system. Banking activities which have been previously exclusive for a component are now performed by another or all of the other components. A development bank premier development, for instances, also performs a previously commercial banking function of checking accounts.

Suppliers extending credit to a buyer for use in manufacturing, processing, or reselling goods for profits are called trade creditors. Credit extended by trade creditors in short-term, is usually unsecured, and is known as trade credit. Trade credit is also sometimes referred to as commercial credit, mercantile credit, and accounts receivable credit.

Trade credit is a form of credit extended by a firm to another firm

Nature of Trade Credit

Trade Creditors

Personal Finance Companies

Finance companies are engaged principally in personal loans is called personal finance companies. Their loan portfolio however may include miscellaneous business loans and commercial accounts receivables loans.

Types of Short-term Loans

1.Unsecured loans – also called clean loans, are those which do not require collateral.

2.Secured loans – are those which require a collateral back-up

In general, secured loans are granted for the following purposes:

Trade Credit Instruments:

1. Open-book credit

2. trade acceptance

3. promissory note

= 34.4%

.95

55

x

=

0.05

360

1 - 0.05

60days - 5days

x

Annual cost

of not taking

discount

=

0.05

360

Number of

day's credit

Discount

period

-

1 - Discount

X

=

Annual cost

of not taking

discount

Discount

360 days

Cost of trade Credit

Insurance Companies

Insurance companies provide a stable source of short term funds.

Commercial Banks

Commercial banks are institutions which individuals or firms may tap as sources of short-term financing. A commercial bank is defined as any corporation which accepts or creates demand deposits subject to withdrawal by check.

Group 2

1.Short-term credits mature more frequently.

2.Short-term debts may, at times, be more costly than long-term debts.

DISADVANTAGES OF SHORT-TERM CREDITS

7. company accruals

6. insurance companies

5. factors

4. finance companies

3. commercial paper houses

2. commercial banks

1. trade creditors

Short-term financing is provided by the following:

THE SUPPLIERS OF SHORT-TERM FUNDS

ADVANTAGES OF SHORT-TERM CREDITS

1.They are easier to obtain.

2.Short-term financing is often less costly.

3.Short-term financing offers flexibility to the borrower.

Originally, the banking system is composed of four highly distinctive components. They are the following:

1.Commercial banks;

2.Development banks;

3.Savings banks; and

4.Rural banks

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