THE EAST ASIA REALM

THE EAST ASIA REALM

PRESENTED BYAIMAN SHAJIA

HASEEBA GILALAMMARA NIZAMUDIN

MAHWISH

ASSIGNED BYMISS ANILA

ContentsSources of Short term financing:• Trade Credit (detailed description)• Unsecured loans• Secured loans• Factoring accounts receivables• Inventory• Commercial paper

• Open Accounts: Form of trade credit in which the buyer establishes a line of

credit with the seller. There after no special arrangements need to be made for each transactions.

• Notes Payable OR Promissory Note: The buyer signs a note that evidences a debt to the seller.

• Trade Acceptances: The seller draws a draft on the buyer that orders the buyer to pay the draft at some future time period.

A firm buying goods and services on credit enters an amount, equal to

the cost of the goods and services, on its balance sheet as account

payable.

Trade Credit:

TYPES OF TRADE CREDIT:

Factors that influence the credit terms

• Merchandise Characteristic:

The terms of sale are influenced by seasonality, perishability , obsolescence cost and demand pattern of merchandise sold on credit.

• Status of Buyer: when costs can be fully passed on through higher prices to the buyer by the seller.

• Status of Seller: when trade costs cannot be passed on to buyers because of price competition and demand.

• Industry Practice: The desire to deviate to any extant from industry practice is stimulated by the financial strength of the buyer and seller

Types of credit terms

• Credit Period Only: A credit term that means “ cash on delivery” and specifies that goods must be paid for, in full, upon delivery, it is used for uncredit worthy customers.

• End Of Month(EOM): A credit terms that means “End Of Month” and indicates that the credit period begin on the first of the following month.

• Cash Discount And EOM:

A credit term which specifies that both a discount period and a credit period begin the first day of the next month.

• Receipt Of Goods (ROG):

A credit term that means “Receipt Of Goods” and indicates that the credit period does not began until the day the goods are received.

• Dating: Credit terms that encourage the buyer of seasonal products to take

delivery before the peak sales period.

• COD and CBD: The buyer pays cash on delivery or cash before delivery. This reduces the seller’s risk under COD to the buyer refusing the shipment or eliminates it completely for CBD.

WHEN TO USE OF TRADE CREDIT

• The use of trade credit is a way of life in the industrial sector of the economy.

• For a firm with increasing sales volume, trade credit “spontaneous” or automatic financing for part of the increase in working capital requirement.

• Trade credit should be used is governed by the explicit and implicit cost of trade credit.

UNSECURED LOANS

Unsecured Loans – A form of debt for money borrowed that is not backed by the pledge of specific assets.

Dimensions Of Unsecured Loans:• Unsecured loans are used primarily for small,

short-term expenses, such as medical crises or wedding or funeral costs.

• An unsecured loan is a loan in which you simply use your credit rating to help you borrow money from the lending institution.

• People who do not have assets or do not want to provide assets as a guarantee may prefer this type of loan as an alternative.

TYPES OF UNSECURED LOANS • Line of Credit• Revolving Credit Agreement• Transaction Loan

• 1-Line of Credit (with a bank) -- An informal arrangement between a bank and its customer specifying the maximum amount of credit the bank will permit the firm to owe at any one time.

• One-year limit that is reviewed prior to renewal to determine if conditions necessitate a change.

• “Cleanup” provision requires the firm to owe the bank nothing for a period of time.

2-Revolving Credit Agreement--A formal, legal commitment to extend credit up to some maximum amount over a stated period of time.

COMMITMENT FEE:A fee charged by the lender for agreeing to hold credit available.Agreements frequently extend beyond 1 year.

3-Transactions Loans:A loan agreement that meet the short-term funds need of the firm for a single, specific purpose.The loan is paid off at the completion of the project by the firm from resulting cash flows.

COMPENSATING BALANCE--• A minimum balance that must be maintained in an account.• The compensating balance is often used to offset a portion of the cost that a

bank faces when extending a loan or credit to an individual or business, and is usually calculated as a percentage of the loan outstanding.

• Bank requires that 10 to 20 % of the borrowing on a line credit be kept as a demand deposit balance

Effective Interest Rate--Effective rate is the interest rate on a loan or financial product restated from the nominal interest rate as an interest rate with annual compound interest payable in arrears.

Uses--It is used to compare the annual interest between loans with different compounding terms (daily, monthly, annually, or other). The effective interest rate differs in two important respects from the annual percentage rate (APR).

EFFECTIVE INTEREST RATE= STATED INTEREST RATE

1- COMPENSATING BALANCE FRACTION

SECURED LOANS

A loan for which the bank requires no collateral.Short term secured loans are typically secured by receivables and inventories.

Land ,buildings ,equipment are used to secured term and long term borrowing.

PLEDGING ACCOUNT RECEIVABLE

One of the most liquid assets accounts.

Loans by commercial bank or finance companies (banks offer lower interest rate).

The lender will evaluate the quality of receivable pledge, size of account.Loans evaluation are made on:

Quality: Not all individual accounts have to be accepted (may reject on aging).

Size: Small account may be rejected as being too costly(per dollar of loan) to handle by the institution.

Pledging ProcedureThe loans value of receivables has been established , the borrower send to the lender a list of account, billing dates and amount involved.

Two types of pledging procedure:

NON NOTIFICATION: On a non-notification basis the is not informed of the financial arrangements between borrower and lender. The account remits payments to the borrower ,who forward it to the lender.

NOTIFICATION: On a notification basis the borrower notifies its accounts the payment on the receivables are to made directly to the lender.

Factoring Receivable:Factoring receivables is different from pledging receivables in that receivables are sold to the factors or financials institutions.

• Service provided by a factors• Mechanics of factoring.• Factoring costs

Inventory Financing:Inventories are also used frequently as collateral for short –term loans.Relatively liquid assets accounts.

CHARACTERISTICS OF INVENTORYThe inventory can be utilized as collateral for short-term loans is dependent upon its three major characteristics:• Marketability.• Perishability.• Price stabilityTYPES OF INVENTORY:

There are four types of inventory.• FLOATING LIEN• TRUST RECEIPTS• TERMINAL WAREHOUSE RECEIPTS:• FIELD WAREHOUSE RECEIPTS:

• FLOATING LIEN: A loan arrangement used when accounts receivable and inventory are used as collateral. With this, there is a general loan against the accounts on the goods without any records being kept on specific ones.

• TRUST RECEIPTS: Short term financing instrument used in inventory pledging, in which the borrower acknowledge its hold merchandise in trust for the lender. It is used when the goods are more easily held by the borrower and when they can be identify by serial number.

• TERMINAL WAREHOUSE RECEIPTS: Short term financing instrument used with pledge inventory in which the goods are transferred to a public warehouse and released only by authorization of the lander. It is used when there is concerned that the borrower might liquidate the inventory without paying.

• FIELD WAREHOUSE RECEIPTS: Short term financing instrument used with pledge inventories where by the goods are transferred to a specified warehouse on the borrower property. The goods cant be released with out the landers authorization. This is done in cases when it is impractical to move than inventory

COMMERIAL PAPER

DEFINITION:• Commercial paper refers to short –term, unsecured

promissory notes, generally issued by large corporations.

• Commercial paper market is composed of the dealer and direct-placement markets.

ADVANTAGES: • Cheaper than a short –term business loan from a

commercial bank.• Dealers requires a line of credit to ensure that the

commercial paper is paid off.