Professional Documents
Culture Documents
SHORT-TERM FINANCING
Short-term financing refers to debt originally scheduled for repayment within one year. Short-term financing is
used to finance all or part of the firms working capital requirements and sometimes to meet permanent financing
needs.
I. TRADE CREDIT
Definition: A trade credit is an agreement where a customer can purchase goods on account (without paying
cash), paying the supplier at a later date.
Accounts payable is a spontaneous source of funds, growing as the business expands on a seasonal or long-
term basis and contracting in a like fashion when business declines.
Payment period
Definition: The period over which the borrower is obliged to make payments.
Trade credit is usually extended for 30 to 60 days (stretching the payment period)
Cash Discount Policy
Cash discount is the reduction in price if the payment is made within a specified time period. Ex. 2/10, n/30
% 360
Cost of failing to take a cash discount = x
100% %
Net Credit Position
It is the measure relationship of accounts receivable and accounts payable.
Accounts Receivable > Accounts Payable
Accounts Receivable < Accounts Payable
360
Effective rate on discounted loan = x
References:
Block, Stanley B., et al. 2009. Foundations of Financial Management. McGraw-Hill/Irwin
Cabrera, Ma. Elenita B. 2015. Financial Management Principles and Applications, Vol. 1. GIC Enterprises & Co. Inc.
http://www.investopedia.com/