Short term financing

Presentors

• Nafisa shadaf B1304014
• Naomi nahid
• naima rashid
• Silma Subah Kimty
• Naushin Saira Noor.

valuation of short term financing

• Assets held short-term are generally taxed at a higher rate than assets held for more than a year.

We will go through

• Spontaneous financing
• calculating annual cost of trade credit
• streching payables and its drawbacks
• Factors affecting the short term borrowing
• Factoring accounts receivables.
• Calculating the effective annual interest rate on short term borrowing

spontaneous financing

• accounts payable
• accrued expenses

accounts payable

• Must be paid off within a given period of time in order to avoid default.
• Essentially a short-term IOU (i owe you) from a customer to the creditor
• Consists of trade credits, trade liabilities, business loans, factoring.
• Liabilities typically increase with the expansion of company's level of operation
• Liabilities increase and decrease. (company's level of operation to blame)

Calculating annual cost of trade credit

• Needed for : To take advantage of the credit period to minimize its cost of funds.
• Taking decision whether it is beneficial for the company to pay within the discount period or pay only by the end of the payment due period.

importance to calculate

• If the cost of funds or short-term investment rate is lower that the cost of trade credit, the company will benefit by paying its bills within the discount period.

way to calculate

Example: The trade credit terms are 2/10, net 60. This means that the customer will get a discount of 2% if paid within 10 days, and if discount is not availed the amount is due in 60 days.

If the company pays on 30th day and on 50th day, the cost of trade credit will be:
Cost of trade credit (payment on day 30) = (1+0.02/0.98)^(365/20) – 1 = 44.58%
Cost of trade credit (payment on day 50) = (1+0.02/0.98)^(365/40) – 1 = 20.24%

stretching payables nd its drawbacks

Drawbacks

• The cost cash discount forgone
• late payment penalties that 'may' be charged.
• The possible deterioration in credit rating.

Factoring accounts recievables

• Alternate to pledging recievables
• factoring transfers title to the buyer unlike pledging.
• contract between the factor and the client
• The firm must pay the factor interest on the advance ( to risk bearing and servicing the recievables) i.e cost of factoring

Accrued expense

• Expense incurred but not yet paid
• costless financing
• interest free source of financing
• high risk of penalties and interest charges .
• less productivity in the organization.

Factors affecting short term borrowing

• Interest rates : paying the prime rate or above that.
• Falling into a spiral : repeated borrowing .
• Secured loan danger: paying the penalty.

Calculating the effective annual interest rate on short term borrowing

Stairway to calculation

• formula:(Total interest paid+total free paid (if any)/usable funds))x(365 days/ no. of days loan is outstanding)
• n.b: Because of the fixed costs involved in credit investigation and in the processing of a loan, "the interest rate on a small loan is higher."

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