SHORT TERM FINANCING

SHORT TERM FINANCING/ Funds

Short term financing is business financing that you obtain usually for a term of one year or less. The term is normally six to twenty four months

SOURCES 

1-      Overdraft

2-      Trade credit

3-      Factoring

4-      Balance of payment

5-      Commercial paper

6-      Treasury bills

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 EXPLANATION

1       An overdraft is an extension of credit from a lending institution when an account reaches zero. An overdraft allows the individual to continue withdrawing money even if the account has no funds in it or not enough to cover the withdrawal. Basically, overdraft means that the bank allows customers to borrow a set amount of money

2      A trade credit is a B2B agreement in which a customer can purchase goods on account (without paying cash up front), paying the supplier at a later date. Usually when the goods are delivered, a trade credit is given for a specific number of days, say 30, 60 or 90 days. Jewelry businesses sometimes extend credit to 180 days or longer. Trade credit is essentially credit that one company gives to another for the purchase of goods and services.
 

3      Balance of payments is a written order to a person requiring them to make a specified payment to the signatory or to a named payee; a promissory note

5      Commercial paper is an unsecured, short-term debt instrument issued by a corporation, typically for the financing of accounts receivable and inventories, and meeting short-term liabilities. Maturities on commercial paper rarely range longer than 270 days. Commercial paper is usually issued at a discount from face value and reflects prevailing market interest rates.

       A Treasury Bill (T-Bill) is a short-term debt obligation backed by the Treasury Department of the U.S. government with a maturity of less than one year, sold in denominations of $1,000 up to a maximum purchase of $5 million on noncompetitive bids. T-bills have various maturities and are issued at a discount from par

7    Factoring means the vendor has supply the raw materials and it did not get the cash back, he will get it after 60 days till then payments is pending. Vendor amount is pile up with outstanding amounts

Two major mechanism of factoring

1-      Non recourse factoring

2-      Recourse factoring

NON RECOURSE 

is generally for those whose companies have account receivable on a high side and in that situation a company can use this mechanism to raise the funds on the short term. Now look the supplier perspectives whose has sold a lot of goods and now it accounts pile up with the A/R sold to factor

                                                                                                                                          

RECOURSE FACTORING

In that case the vendor contact to the factor to recover its amount form the customer then factor will recover the amount of the vender and give it back to the vendor. Factor will receive minimum amounts as compare to non recourse factoring