Chapter 14: Short-term finance and investments Flashcards
What are the four main sources of short term financing?
Trade payables
Factoring/invoice discounting
Bank overdraft
Financing exports
How can trade payables be used as a source of short term financing?
Delaying payments to suppliers
What are the advantages of paying suppliers late?
Alleviates cash flow difficulties
Cash can earn a return whilst still in the paying entity’s account
What are the disadvantages of paying supplier late?
Loss of settlement discount
Could obtain poor credit rating
Supplier may stop further supplies
Could face legal action
What is factoring?
Outsorcing of the credit control department to a third party
What are the three services factors offer?
Debt collection
Financing
Credit Insurance
What is invoice discounting?
Selected invoices used as security against which the entity may borrow funds
What are the advantages of invoice discounting?
Factor does not chase customer directly
May be easier option for a new starter business to raise finance
What are the two main sources of bank lending?
Bank overdrafts
Bank loans
What are the methods in place for controlling credit risks of financing exports?
Documentary credits
Bills of exchange
Export factoring
Forfaiting
What is a documentary credit?
Bank of buyer provides letter of assurance to seller
What is a bill of exchange?
Contact/agreement that payment will go out on a date
What is export factoring?
Same as debt factoring but overseas
What is forfaiting?
Same as export factoring but is used for medium/long term finance.
Forfeiter will buy debt for discount
What are some sources of short term investments?
Interest-bearing bank accounts
Negotiable instruments
Short-dated government bonds
