FINANCIAL MANAGEMENT

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SOURCES OF SHORT TERM

FUND

Trade credit

• Trade credit is the largest use of capital for a majority of business to business (B2B) sellers in the United States and is a critical source of capital for a majority of all businesses. For example, Wal-Mart, the largest retailer in the world, has used trade credit as a larger source of capital than bank borrowings;

ACCRUED EXPENSES

• Accrued expense is expense which has been incurred but not yet paid

• The accrued expenses are paid at the end of a period which increases the liquidity position of the company

COMMERCIAL PAPER

Commercial paper is an unsecured promissory note issued by a firm to raise funds for a short period , generally varying from days to a few month

INTER-CORPORATE DEPOSITS

Inter-corporate deposits are deposits made by one company with another company, and usually carry a term of six months. The three types of inter-corporate deposits are: three month deposits, six month deposits, and call deposits.

The annual rate of interest given for three month deposits is 12%.

SHORT TERM UNSECURED DEBENTURES

• Companies can raise short term fund by issuing debentures for periods ranging from one months to 17 months . The rate of interest on these debentures are relatively higher than the rate on secured long term debentures

BANK CREDIT Commercial banks provide credit

facilities to meet the working capital requirements of business firm, such loans are allowed for short periods, the maximum of which would be one year

INDIRECT SOURCE OF

FUND

Deferred Credit

Suppliers of costly machines , plants and equipments will provide credit facilities by which payment for the same can be deferred and in some cases credit period may extend to many years , this will enable the firm to use assets without huge immediate payment

BILL DISCOUNTING

Payment is possible in the form of accepted bills. The suppliers can discount the bill with their bank and realize the bill proceeds . This will help to stretch the payment period even up to 6 months

VENTURE CAPITAL

Venture capital (VC) is financial capital provided to early-stage, high-potential, high risk, growth startup companies. The venture capital fund makes money by owning equity in the companies it invests in, which usually have a novel technology or business model in high technology industries, such as biotechnology, IT and software.

HIRE PURCHASE / INSTALMENT SCHEME

A hire purchase is termed an installment plan although these may differ slightly as in a hire purchase agreement the ownership of the good remains with the seller until the last payment is made

FACTORING It is an agreement btwn the seller of

goods and a financial firm, in which financial firm purchases the receivable of the seller and collects the amount from debtors

FORFAITING• In trade finance, forfeiting is a financial

transaction involving the purchase of receivables from exporters by a forfeiter. The forfeiter takes on all the risks associated with the receivables but earns a margin. The forfeiter may also be immunized from certain risks if the transaction involves payment by negotiable instrument. The forfeiting is a transaction involving the sale of one of the firm's transactions.

SECURITIZATION

Securitization refers to the process of converting long term assets like loans and receivables in to marketable securities

LEASE FINANCING

• A finance lease or capital lease is a type of lease. It is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle, software);

• the lesser (finance company) will purchase that asset;

• the lessee will have use of that asset during the lease;

• the lessee will pay a series of rentals or installments for the use of that asset;

• the lesser will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;

• the lessee has the option to acquire ownership of the asset

SEED CAPITAL ASSISTANCE• The initial capital used to start a

business. Seed capital often comes from the company founders' personal assets or from friends and family. The amount of money is usually relatively small because the business is still in the idea or conceptual stage

Such a venture is generally at a pre-revenue stage and seed capital is needed for research & development, to cover initial operating expenses until a product or service can start generating revenue, and to attract the attention of venture capitalists.

Operating / service lease• An operating lease is a lease whose term is

short compared to the useful life of the asset or piece of equipment (an airliner, a ship, etc.) being leased. An operating lease is commonly used to acquire equipment on a relatively short-term basis. Thus, for example, an aircraft which has an economic life of 25 years may be leased to an airline for 5 years on an operating lease

• Operating lease is short term lease and the lease period in such a contract would be less than the useful life of asset

• The lease is usually cancellable by the lessee• Lease agreement normally contains provision

for renewal of agreement after the expiry of lease period

• The lesser is generally responsible for

Financial lease• A finance lease or capital lease is a type

of lease. It is a commercial arrangement where:

• the lessee (customer or borrower) will select an asset (equipment, vehicle, software);

• the lessor (finance company) will purchase that asset;

• the lessee will have use of that asset during the lease;

• the lessee will pay a series of rentals or installments for the use of that asset;

• the lessor will recover a large part or all of the cost of the asset plus earn interest from the rentals paid by the lessee;

• the lessee has the option to acquire ownership of the asset (e.g. paying the last rental, or bargain option purchase price);

• it's not cancellable• the leassor may or may not bear the cost of

insurance, repair, maintenance etc. Usually the leasee has to bear all cost.

• the leassor transfer ownership of the asset to the lessee by the end of the lease term

• the lessee has an option to purchase the asset at a price which is expected to be sufficiently lower than the value at the end of the lease period