Spontaneous sources of financing are a very effective way to absolve the main needs of a company, since these allow us to maintain healthy finances and generate a source of money movement.
Supplier trade credit is an important source of short-term financing for the company. If the company has a strict policy regarding its punctuality of payment, the commercial credit turns into spontaneous (or incorporated) financing that varies with the production cycle.
When a cash discount is offered for prompt payment but not taken, the lost cash discount becomes a commercial credit cost% discount / (100 -% discount)
The larger the period between the end of the discount period and the time the account is paid, the lower the annual percentage of the opportunity cost incurred.
Stretching accounts payable involves deferring payment after the due date, although this generates additional short-term financing; it must be weighted with respect to the costs involved such as: cost of discount for early payment lost, surcharges for late payments or interest charges and deterioration in the credit classification, along with the abilities of the company to obtain a future credit.
Accumulated expense accounts represent a spontaneous source of financing, the main accounts are wages, and taxes and the goal is to pay them on the established dates.
Until these accounts are paid, interest-free financing is provided to the company, a constant company receives this constant financing.
As old accrued expense accounts are paid, new expenses are incurred and the amount of accrued expenses fluctuates accordingly.
A company with serious financial difficulties will sometimes defer payments of wages and tax, but the consequences of such deferment can be severe.
Credit in the money market and short-term loans are forms of short-term financing negotiated in the public or private market. Sometimes large, well-established, high-quality companies borrow on a short-term basis using commercial paper.
Commercial paper represents a short-term unsecured note that is sold on the money market. Commercial paper is sold through intermediaries or directly to investors. Instead of issuing standalone paper, a company may issue bank-backed paper, in which case, a bank guarantees that the obligation will be paid. The main advantage of commercial paper is that it is cheaper than a short-term business loan from a commercial bank.
Bank Acceptance Financing is another type of credit in the money market. Normally associated with a foreign business transaction, acceptance is highly negotiable and can be a highly desirable source of short-term funds.
Short-term loans can be divided into secured and unsecured
The short-term unsecured loan is generally limited to commercial bank loans under a line of credit, a revolving credit agreement, or a transaction loan.
Banks often require companies to maintain cash balances to offset a loan agreement. If the borrowing company is required to maintain balances higher than it would normally maintain, the effective cost of borrowing increases.
Interest rates on short-term business loans are a function of the cost of funds for banks, the existing premium rate, the credit merit of the borrower, and the profitability of the relationship for the bank.
Many companies unable to obtain unsecured credit are required by the lender to post collateral.
When giving a guaranteed loan, the lender has two sources of loan repayment: the ability of the firm's cash flow to service the debt, and if that source fails for any reason, the collateral value of the guarantee. To provide a margin of safety, a lender will anticipate slightly less than the market value of the collateral.
Accounts receivable and inventory are the main assets used to guarantee short-term business loans.
There are several ways in which a lender can obtain a guaranteed interest on inventories; with a floating lien agreement, pledge guarantee on the furniture or trust agreement.
The borrower has possession of the inventory. Under a local warehouse depot certificate or warehouse depot certificate method, an independent third party owns the inventory.
Rather than depositing accounts receivable, a company may engage in factoring (selling) accounts receivable to acquire cash.
Factoring often relieves the business of the credit check, the cost of processing accounts receivable, collection charges, and bad debt expenses.
The best combination of alternative sources of short-term financing depends on considerations of cost, availability, timing, flexibility, and the degree to which the company's assets are taxed (with legal claims).
