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Chapter 9 - Short-term debt. The following will be discussed in this chapter: trade credit, bank overdrafts, commercial bills, calculations: discount securities, promissory notes, negotiable certificates of deposit, inventory finance, accounts receivable, financing and factoring. | Chapter 9 Short-term debt Learning objectives Overview of the characteristics of various forms of short-term debt Main types Trade credit, bank overdraft, commercial and bank-accepted bills, promissory notes, negotiable certificates of deposit, inventory accounts receivable and factoring Sources Reasons and patterns of use Advantages and disadvantages for borrowers and lenders Calculations relevant to discount securities Chapter organisation 9.1 Trade credit 9.2 Bank overdrafts 9.3 Commercial bills 9.4 Calculations: discount securities 9.5 Promissory notes 9.6 Negotiable certificates of deposit 9.7 Inventory finance, accounts receivable, financing and factoring 9.8 Summary 9.1 Trade credit Short-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers’ particular needs Timing of repayment, risk, interest rate structures (variable or fixed) and the source of funds Matching principle Short-term assets should be funded with short-term liabilities The importance of this principle was highlighted by the GFC (cont.) 9.1 Trade credit (cont.) A supplier provides goods or services to a purchaser with an arrangement for payment at a later date Often includes a discount for early payment (e.g. 2/10, n/30, i.e. 2% discount if paid within 10 days, otherwise the full amount is due within 30 days) From provider’s perspective Advantages include increased sales Disadvantages include costs of discount and increased discount period, increased total credit period and accounts receivable, increased collection and bad debt costs (cont.) 9.1 Trade credit (cont.) The opportunity cost of the purchaser forgoing the discount on an invoice (1/7, n/30) is: Chapter organisation 9.1 Trade credit 9.2 Bank overdrafts 9.3 Commercial bills 9.4 Calculations: discount securities 9.5 Promissory notes 9.6 Negotiable certificates of deposit 9.7 Inventory finance, accounts receivable, financing and factoring 9.8 Summary | Chapter 9 Short-term debt Learning objectives Overview of the characteristics of various forms of short-term debt Main types Trade credit, bank overdraft, commercial and bank-accepted bills, promissory notes, negotiable certificates of deposit, inventory accounts receivable and factoring Sources Reasons and patterns of use Advantages and disadvantages for borrowers and lenders Calculations relevant to discount securities Chapter organisation 9.1 Trade credit 9.2 Bank overdrafts 9.3 Commercial bills 9.4 Calculations: discount securities 9.5 Promissory notes 9.6 Negotiable certificates of deposit 9.7 Inventory finance, accounts receivable, financing and factoring 9.8 Summary 9.1 Trade credit Short-term debt is a financing arrangement for a period of less than one year with various characteristics to suit borrowers’ particular needs Timing of repayment, risk, interest rate structures (variable or fixed) and the source of funds Matching principle Short-term assets should be .
