Short Term Funding Flashcards
When to use ST funding
To fund ST working capital needs
Total finance needs of firm
Conservative v aggressive policy
NCAs - used to generate sales - Use LT Finance
Working Capital - Fluctuates - ST Finance
Permanent Current Assets - must make a choice
Conservative: use LTdebt/equity, more certainty at a higher cost
Aggressive: Use ST funds, more risky at a lower cost
Goal of internal funding
4 ways to improve working capital management
-Optimise cash within, get csh into bank
- Debt collection
- Slow down payments
- Delay capital investment
- Sell ST investments
6 impactors on ability to borrow
Financial strength Industry attractiveness, prospects and risk Economic conditions Collateral available Debt already held Bank relationship with company
Gearing equation
Gearing = Debt / debt + equity
It is a measure of a company’s financial leverage and shows the extent to which its operations are funded by lenders versus shareholders. Put in £1 equity debt provider would do max £1.
If >50% then highly leveraged/geared
<25% low risk
What is trade finance
-Commerce and international trade
-Lending, issuing credit, factoring, etc.
The function of trade finance is to introduce a third-party to transactions to remove the payment risk and the supply risk while providing the exporter with receivables according to the agreement and the importer with extended credit.
3 facilities offered by banks
Overdraft, term loans, RCF
Overdraft
Repayable on demand. Has an arrangement fee. Interst charged on balance. Often must provide audited accounts and many financial requirements.
Term loan
CREDIT >1 years. Variable or fixed. Charged on full amount.
Revolving credit facility
CREDIT allows co. to keep taking more after paid off loan
Borrow and repay over life. Often secured against working capital.
Commitment fee, setup fee
Libor +
Up to a limit (100K 1m etc.)
+Not repayable on demand
+Drawdown and repay
7 Options of funding
- Invoice Finance
- Hire purchase
- Leasing
- Supply chain finance
- Money markets
- Bills
- Commercial Paper
Invoice finance
- Factoring
- Invoice Discounting
Factoring: appoint someone else to collect invoices for you for a fee. Often faster.
Invoice discounting: factoring party gives cash up front on specific invoices. Comes at a fee.
-Legally cannot have a debt collector
Hire purchase
Hire for most of period then pay at end. Legal title passes.
Leasing
May or may not buy. Dont have to pay upfront.
“Substance over Form”
REGULATION - MUST DECLARE BOTH AND SAY WHAT IS WHAT
+Popular
-Cannot post as collateral
Supply chain finance
Example
Connecting all the supply chain onto one platform, allowing for IT friendly factoring
Get cash sooner
E.g. sainsburies, Wal-Mart, many amazon sellers
