CHAPTER

EIGHT

Sources of Short-Term
Financing

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PPT 8-1

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Figure 8-1
Structure of corporate debt, 1998

35%
30%
25%
20%
15%
10%
5%
0%
Accounts
payable

Bank loans

Other short
term loans

Short term
paper

Bonds

Mortgages

Source: Statistics Canada, Financial St at ist ics for Enterprises, Catalogue 61-008XPB , 3rd quarter 1998

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Figure 8-2
Prime interest rate movements

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Figure 8-3
Corporate short-term paper outstanding
100
90
80

$ billions

70
60
50
40
30
20
10
0

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1 97 5

1 98 0

1 98 5

Bankers' acceptance s

1 99 0

1 99 5

1998

Commercial paper

Source: Bank of Canada Review, Autumn 1998.

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Figure 8-4
Comparison of commercial paper rate to bank prime rate*
20
18
16
14

percenta ge

12
10
8
6
4
2

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0
68

1970

1980

9 0 da y co mm ercia l pa per

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* Average interest rate at December 31

1990

1998

P rime
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Chapter 8 - Outline

LT 8-1

Sources of Short-Term Financing

Trade Credit
Net Credit Position
Types of Bank Loans
Corporate and Foreign Borrowing
Accounts Receivable Financing
Inventory Financing
Longer-term Loans

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Sources of Short-Term Financing

LT 8-2

There are various sources of short-term funds available to a

firm:
Trade Credit from Suppliers
Bank Loans
Corporate Promissory Notes
Bankers Acceptances
Foreign Borrowing
Loans Against Receivables and Inventory

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Trade Credit from Suppliers

LT 8-3

The largest source of short-term financing for a firm-over

50%
It is usually a 30-60 day grace period before a bill is due
A cash discount is often given if payment is made within a
specified time
Ex., 2/10 net 30 means a 2% discount is given if paid in
10 days; if not, the full amount is due in 30 days

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Net Credit Position

LT 8-4

Net Credit Position:

a firms Accounts Receivable (A/R) minus its Accounts
Payable (A/P)
if A/R is greater than A/P, it is a net provider of trade
credit (positive number)
if A/P is greater than A/R, it is a net user of trade credit
(negative number)
larger firms tend to be net providers of trade credit,
while smaller firms are net users
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Types of Short-term Bank Loans

LT 8-5

Line of Credit:
company is able to draw upon a yearly borrowing
facility arranged in advance
revolving credits are for periods longer than 1 year
general purpose loans
Transaction Loan:
short-term loan for a specific purpose
Compensating Balance:
when a bank requires a minimum average account
balance in order to qualify for a loan
can be thought of as a form of collateral
less common than in the past
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Corporate and Foreign Borrowing

LT 8-6

Commercial Paper:
a short-term unsecured promissory note in minimum units of
$50,000
sold (at a discount) by finance companies, other large corporations
cheaper than bank loans
total amount of commercial paper outstanding has increased
greatly in recent years
Bankers Acceptances
to finance goods in transit (particularly imports)
sold at a discount
Eurodollar Loans:
loans from foreign banks denominated in Canadian dollars are
called Eurodollar loans (U.S Eurodollars predominate)
foreign interest rates may be lower
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Accounts Receivable Financing

LT 8-7

A/R financing includes 3 choices:

pledging accounts receivable as collateral for a loan
an outright sale (factoring) of receivables to a factoring
company
Asset-backed Securities: sale of receivables by large
corporations in public offerings
Tends to be a relatively expensive source of financing

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Inventory Financing

LT 8-8

Inventory may be assigned as collateral security against an

operating loan
For example, in a Trust Receipt or Floor Planning
loan is based upon serial numbers on product
when goods are sold, loan is repaid
used by auto dealers, industrial equipment dealers,
television and home appliance dealers

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Longer-term Loans

LT 8-9

Term Loan (Instalment Loan):

loan for 1-7 years
interest rate may be fixed or change with prime rate
repaid in monthly or quarterly instalments
used to buy capital assets (ex; automobiles, property)

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