Question

28. Bank loans and bills of exchange with focus on:

A.short-term bank loans/credits used for operational funding

B.supplier credits, their importance and types

C..long-term bank loans/credits used for strategic funding

D. nature of discounting bills and discount loans

E. other external sources for long-term corporate financing

Answer 1

A) Short term bank loans or cash credit facility are used for financing the working capital needs of the company. These are used to pay the suppliers and wages before the receivables from the market are converted to cash.

B) Supplier credit is a form of trade financing wherein the importer gets access to cheaper foreign credit and the supplier is able to get payment on sight basis through a letter of credit.

The importance of supplier credit is that it facilitates trade and allows the alignment of the payable and receivables of the importer to ensure continuity of operations.

Suppliers credit can directly extended by the supplier company or it can be arranged through a foreign bank which extends the credit in exchange for an interest costs.

C) Long term loans are used for funding capital projects or asset acquisition by companies. The use of debt and the associated interest payment which result in tax shields can reduce the cost of capital for the company. Thus through efficient use of long term debt, the capital projects which may not seem feasible could become commercially viable.

Also the debt repayment could be restructured to ensure the cash flows from the project matches the debt repayment requirements. Thus long term debt finacing is especially useful for long term projects.

D) The discounting of bills is a useful mechanism to avail funds by submitting the bill of exchange or the promissory note to the bank. The bank buys the bill at a discount and pays the seller funds after deducing the discount and later collects the receivable when the payment on the bill becomes due.

E) Additional source of long term financing is through issuance of common or preference stock and raising funds through equity. Other options could be through issuance of debentures and convertible bonds.