Question

5. The cash budget shows that the company will need $2 million to finance its working capital needs in next three years. List five sources of short-term financing the company can use to raise the money.

Answer 1

short term finance means financial needs less than 1 year.it is also called working capital management. and it is mainly used to woking capital requirement of the business.

Sources of short term financing

1. Trade credit
2. Factoring
3. Business line of credit
4. Invoice discounting
5. Short term / Working capital loan

Trade credit

it is happening on purchasing of items on credit. it is an important source of financing of small, medium sized business. if vendor is giving cash discount for paying. the payment should be made with in the cash discount period.

= [360 /( Total period for payment - period of discount payment)] * [Discount % / (100% - Discount %)]

Factoring

a business is selling its receivables into a third party at a discount for raising fund.mainly there are two types of factoring

a) Recourse Factoring : client will be buy back the unpaid receivable from the factor.

b) Non Recourse factoring : factor will bear obligation of unpaid bills receivable

Business line of credit

it is a short term sources of financing,amount is issueing financial institution or bank.business can be deposit or make the payment ,once payment is received. it is working as a revolving credit

Invoice discounting

under this option,receivable can be discounted with the third party, bank or other financial institutions. at the time of discount bank will paying money to us and bank will collect money from customers when the payment of bill

Short term financing

this is mainly provided by the bank and financial institutions. they will give money after conducting a detailed study of the party such as working capital cycle, past track record etc.... the company can paying the money by installment.it is mainly used for permanent working capital needs.