Question

a) Briefly explain the various sources of short term financing available to a Multinational
Company.

Answer 1

Followings are the fund sources for an MNC,

Sister firm (inter co) financing

Quickest, cheapest & easiest source would be to have such source of financing wherein the sister co finances the other co.In addition, interest rates on inter-company loans are frequently required to fall within set limits.

Bill discounting

Bill Discounting is a discount/fee which a bank takes from a seller to release funds before the credit period ends. Bill Discounting is mostly applicable in scenarios when a buyer buys goods from the seller and the payment is to be made through letter of credit.

Domestic currancy financing

Working capital can be sourced locally, for both convenience and exposure management purposes. The main types of bank financing include overdrafts, discounting, line of credit, revolving credit and term loans.

Trade credit

Trade credit allows businesses to receive goods or services in exchange for a promise to pay the supplier within a set amount of time. It is also where one business provides a line of credit to another business for buying goods and services.

Commercial paper

Short term unsecured promissory note – sold to institutional investors and corporations by large corporations. Commercial paper is quoted on a discount basis, meaning that the interest is subtracted from the face value to arrive at the price.

Revolving Credit Agreement

A revolving credit agreement is similar to a line of credit except that now the bank (or syndicated of banks) is legally committed to extend credit up to the stated maximum.