财务管理基础课件：Sources of Short-Term Financing

SourcesofShort-TermFinancing

ChapterOutlineTradecreditfromsuppliersBankloansCommercialpaperCollateralsforlargeramountofborrowingUsinghedgingtooffsettheinterestrateriskTradeCreditApproximately40percentofshort-termfinancingisintheformofaccountspayableortradecreditAccountspayableIsaspontaneoussourceoffundsGrowsasthebusinessexpandsContractswhenbusinessdeclinesPaymentPeriodTradecreditisusuallyextendedfor30–60daysExtendingthepaymentperiodtoanunacceptableperiodresultsin:AlienatesuppliersDiminishedratingswithcreditbureausMajorvariableindeterminingthepaymentperiod:ThepossibleexistenceofacashdiscountCashDiscountPolicyAllowsreductioninpriceifpaymentismadewithinaspecifiedtimeperiodExample:A2/10,net30cashdiscountmeans:Reductionof2%iffundsareremitted10daysafterbillingFailuretodosomeansfullpaymentofamountbythe30thdayNet-CreditPositionDeterminedbyexaminingthedifferencebetweenaccountsreceivableandaccountspayablePositiveifaccountsreceivableisgreaterthanaccountspayableandviceversaLargerfirmstendtobenetprovidersoftradecredit(relativelyhighreceivables)Smallerfirmsintherelativelyuserposition(relativelyhighpayables)BankCreditProvideself-liquidatingloansUseoffundsensuresabuilt-inorautomaticrepaymentschemeChangesinthebankingsectortoday:Centeredaroundtheconceptof‘fullservicebanking’ExpandedinternationallytoaccommodateworldtradeandinternationalcorporationsDeregulationhascreatedgreatercompetitionamongotherfinancialinstitutionsBankCredit(cont’d)Recessionof2007–2009ThelongestonrecordsincetheGreatDepressionofthe1930sForcedmanylargebanksonthevergeofcollapseWiththeenactmentoftheGramm-Leach-BlileyActin1999,commercialbanksandinvestmentbankswereallowedtomerge.Thesecombinationswereresponsibleforbankstotakeexcessriskwhichledtothecreditproblemsthatstartedtoshowupin2007.PrimeRateandLIBORPrimerateTherateabankchargestoitsmostcreditworthycustomersIncreasesasacustomer’screditriskincreasesLIBOR(LondonInterbankOfferedRate)Rateofferedtocompanies:HavinganinternationalpresenceAbilitytousetheLondonEurodollarmarketforloansPrimeRateversusLIBORonU.S.DollarDepositsCompensatingBalancesAnaverageminimumaccountbalancetobemaintainedasanalternateforfeechargedbythebankforservicesrenderedWheninterestratesarelower,thecompensatingbalancerisesRequiredaccountbalancecomputedonthebasisof:PercentageofcustomerloansoutstandingPercentageofbankcommitmentstowardsfutureloanstoagivenaccount

CompensatingBalances(cont’d)Theamountthatmustbeborrowediscalculatedbytakingtheneededfundsanddividingby(1−c),wherecisthecompensatingbalanceexpressedasadecimal.Forexample,if$100,000isneeded,theamountborrowedmustbe$125,000considering20%ofamountborrowedasthecompensatingbalance.Thisiscomputedas:

Amounttobeborrowed=Amountneeded÷ (1–c) Amounttobeborrowed=$100,000÷(1–0.2) Amounttobeborrowed=$125,000

MaturityProvisionsTermloanCreditisextendedforonetosevenyearsLoanisusuallyrepaidinmonthlyorquarterlyinstallmentsOnlysuperiorcreditapplicants,qualifyInterestratefluctuateswithmarketconditionsInterestratemaybetiedtotheprimerateorLIBORCostofCommercialBankFinancingEffectiveinterestonaloanisbasedonthe:LoanamountDollarinterestpaidLengthoftheloanMethodofrepaymentEffectiverate=Interest×Daysintheyear(360)PrincipalDaysloanisoutstandingCostofCommercialBankFinancing(cont’d)Incaseofdiscountedloan–interestisdeductedinadvance–effectiverateincreasesEffectiverate=Interest×Daysintheyear(360)ondiscountedloanPrincipal-interestDaysloanisoutstandingInterestCostswithCompensatingBalancesAssumingthat6%isthestatedannualrateandthat20%compensatingbalanceisrequired;Effectiveratewith=Interestcompensatingbalances(1–c)=6%=7.5%(1–0.2)Whendollaramountsareusedandthestatedrateisnotknown,thefollowingcanbeusedforcomputation:DaysinaEffectiveratewith=Interest×

year(360)

compensatingbalances(Principal–CompensatingDaysloanisbalanceindollars)outstanding

RateonInstallmentLoansInstallmentloansrequireaseriesofequalpaymentsovertheperiodoftheloanEffectiverateofinterestoninstallmentloanswouldbealmostdoublethequotedrateofinterest

Effectiverateoninstallmentloan=2×Annualno.ofpayments×Interest (Totalno.ofpayments+1)×PrincipalAnnualPercentageRateTruthinLendingActof1968requirestheactualAPRtobegiventotheborrowerAnnualpercentagerule:RequirestheuseoftheactuarialmethodofcompoundedinterestduringcomputationLendermustcalculateinterestfortheperiodontheoutstandingloanbalanceatthebeginningoftheperiodItisbasedontheassumptionsofamortizationTheCreditCrunchPhenomenonTheFederalReservetightensthegrowthinthemoneysupplytocombatinflation–theeffect:DecreaseinfundstobelentandanincreaseininterestratesIncreaseindemandforfundstocarryinflation-ladeninventoryandreceivablesMassivewithdrawalsofsavingsdepositsatbankingandthriftinstitutions,fuelledbythesearchforhigherreturnsCreditconditionscanchangedramaticallyandsuddenlydueto:UnexpecteddefaultsEconomicrecessionsChangesinmonetarypolicyOthereconomicsetbacksFinancingThroughCommercialPaperCommercialpaperrepresentsa:short-term,unsecuredpromissorynoteissuedtothepublicinminimumunitsof$25,000(exceptassetbackedcommercialpapers).Formsofcommercialpaper:Financepaper/directpaper((papersoldbyfinancialfirmsdirectlytothelender)Dealerpaper(papersoldbycompaniesthroughdealernetwork)Asset-backedcommercialpaperBook-entrytransactionsComputerizedhandlingofcommercialpaper,wherenoactualcertificateiscreatedTotalCommercialPaperOutstandingAdvantagesofCommercialPaperMaybeissuedatbelowtheprimeinterestrate.AsindicatedinthelastcolumnofTable8–1,thisratedifferentialisnormally2to3percentNoassociatedcompensatingbalancerequirementsAssociatedprestigeforthefirmtofloattheirpaperinasnobbishmarketComparisonofCommercialPaper

RatetoPrimeRateTable8-1LimitationsontheIssuanceofCommercialPaperManylendershavebecomerisk-aversepostamultitudeofbankruptciesFirmswithdowngradedcreditratingdonothaveaccesstothismarketThefundsgenerationassociatedwiththisislesspredictableLacksthedegreeofcommitmentandloyaltyassociatedwithbankloansForeignBorrowingEurodollarloanDenominatedindollarsandmadebyforeignbankholdingdollardepositsShort-termtointermediateterminmaturityLIBORisthebaseinterestpaidonloansforcompaniesofthehighestqualityBorrowfrominternationalbanksinforeigncurrency:Throughforeignsubsidiary,whichconvertsforeigncurrencyintodollarsandsendtotheparentcompanyBorrowingfirmmaysuffercurrencyriskUseofCollateralinShort-TermFinancingSecuredcreditarrangementwhen:CreditratingoftheborroweristoolowNeedforfundsisveryhighPrimaryconcern–whethertheborrowercangenerateenoughcashflowtoliquidatetheloanwhendueUniformCommercialCodeStandardizesandsimplifiestheproceduresforestablishingsecurityagainstaloan

AccountsReceivableFinancingIncludes:PledgingaccountsreceivablesFactoringoranoutrightsaleofreceivablesAdvantage:PermitsborrowingtobetieddirectlytothelevelofassetexpansionatanypointintimeDisadvantage:RelativelyexpensivemethodofacquiringfundsPledgingAccountsReceivablesLendingfirmdecidesonthereceivablesthatitwilluseasacollateralLoanpercentagedependsonthefirms:ThefinancialstrengthThecreditworthinessInterestrateiswellabovetheprimerateComputedagainstthebalanceoutstandingFactoringReceivablesReceivablesaresoldoutrighttothefinancecompanyFactoringfirmsdonothaverecourseagainstthesellerofthereceivablesFinancecompaniesmaydoallorpartofthecreditanalysistoensurethequalityoftheaccountsFactoringfirmis:Absorbingrisk–forwhichafeeiscollectedActuallyadvancingfundstotheselleratthelendingrateFactoringReceivables

–ExampleIf$100,000amonthisprocessedata1%commission,anda12%annualborrowingrate,thetotaleffectivecostiscomputedonanannualbasis1%......Commission

1%......Interestforonemonth(12%annual/12)2%......Totalfeemonthly2%......MonthlyX12=24%annualrateTheratemaynotbeconsideredhighduetofactorsofrisktransfer,aswellasearlyreceiptoffundsItalsoallowsthefirmtopassonmuchofthecredit-checkingcosttothefactorAssetBackedPublicOfferingThereisanincreasingtrendinpublicofferingsofsecuritybackedbyreceivablesascollateralInterestpaidtotheownersistaxfreeAdvantagestothefirm:ImmediatecashflowHighcreditratingofAAorbetterProvides:CorporateliquidityShort-termfinancingDisadvantagetothebuyer:Riskassociated–receivablesactuallybeingpaidInventoryFinancingFactorsinfluencinguseofinventoryforfinancing:MarketabilityofthepledgedgoodsAssociatedpricestabilityPerishabilityoftheproductDegreeofphysicalcontrolthatthelendercanexerciseovertheproductStagesofProductionStagesofproductionRawmaterialsandfinishedgoodsusuallyprovidethebestcollateralGoodsinprocessmayqualifyonlyasmallpercentageoftheloanNatureofLenderControlProvidesgreaterassurancetothelenderbuthigheradministrativecostsTypesofArrangements:BlanketinventoryliensLenderhasageneralclaimagainstinventoryTrustreceipts(floorplanning)Aninstrument–theproceedsfromsalesintrustforthelenderWarehousingAreceiptissue–goodscanbemovedonlywiththelender’sapprovalPublicwarehousing(withawarehousingfirm)Fieldwarehousing(ontheborrowerspremises)AppraisalofInventoryControlDevicesWell-maintainedcontrolmeasuresinvolve:SubstantialadministrativeexpensesRaiseoverallcostofborrowingExtension