BU283 Chapter 15: Chapter 15.5 Short-Term Financing Alternatives
Document Summary
Bu283 chapter 15: the management of working capital. When a firm requires more short-term assets than it can accumulate through careful management, it may use alternative sources (e. g. short term bank loans, trade credit) Banks tend to specialize in customizing short-term loans. Advantage to bank: charge fees every time new loan is made. Advantage to firm: bank can be more flexible in its terms and conditions than publicly issued debt. Short term interest rates tend to be lower than long-term rates. Firms may prefer to obtain short term loans instead of long term b/c cheaper. Additional risk from using short term money in that cost of borrowing can rise if interest rates increase. Short term bank loans are often self-liquidating, meaning loan is made to finance an asset that will pay off loans. When receivables are paid, proceeds are given back to retire the debt. Receivable financing: requires firm to pledge its a/r to bank as collateral for loan.
