...Long-Term and Short-Term Financing Long-Term and Short-Term Financing Long-Term and Short-Term Financing There will come a time when the company will want to make improvements for the company, during this time the company will need more funding for new equipment, enhanced cash flow, new technology, and any other company expansion they want or ay need. It is normal for any business to have debts once in a while just to support the rest of their business operations. For this, the company may choose between long-term financing and short-term financing. They should determine the company’s needs and understand the difference between the two options before determining which of these options is most advantageous for the company. The best option for financing needs that last a year or less is short-term financing. Short-term financing will provide the company with enough capital needed. Promissory noted, short-term loans, inventory loans, over drafting, and letter of credits are part of short-term financing. Short-term loan will help the business by boosting the inventory orders, daily supplies of the company, and wage distribution aside from raising capital. Signing a short-term loan which is payable for six months is the best example of how short-term financing works. Thinking about it positively, he can use the profit from their sales to pay this loan. If the company is confident in paying the loan back on the due date they should use such loan. (Thompson, 2001) ...
Words: 340 - Pages: 2
...Long-Term Short-Term Financing Gwen Florence University of Phoenix June 19, 2012 Long-Term Short-Term Financing Both new and established businesses will find it necessary to incur debts during the course of business operations. Financing may be sought for a multitude of reasons – like smoothing cash flow, purchasing equipment, or expanding operations. The choice between short- and long-term financing options should be determined based on each business’ individual needs. To make that determination, businesses also need to understand when each type of financing is appropriate. For financing needs over a period of a year or less, sort term financing can be used to inject capital into businesses (Ross, Thompson, Christensen, Westerfield, Jordan, 2001). Short term financing options include short-term loans, letters of credit, promissory notes, over drafting, and inventory loans. These options are often used by businesses to cover day-to-day costs like supplies, inventory orders, and wages. Due to the nature of their shifting demands, seasonal businesses in particular often use short term finance arrangements. An example of short-term financing is a company signing a short-term loan in order to purchase more inventories. Proceeds from sales of goods would be used to repay the loan. This is appropriate only if the capital required by the firm can be paid off within the loan’s timeframe. For financing needs over a longer...
Words: 353 - Pages: 2
...Long-Term and Short-Term Financing FIN/200 November 19, 2010 David Stretton Long-Term and Short-Term Financing All business owners make profit but they also acquire debt in the process of making money. In order to make money as a business owner you have to spend money to be successful. So, in order for a business to stay afloat the business owners may decide to purchase big ticket items that they really do not have the on hand revenue for. In order for a business owner to purchase these items or even expand the business they must decide what type of financing they need to do so. Depending on the businesses needs they could either choose to go with long-term financing or short-term financing. If a business owner wants to finance something for a shorter period of time like one year or less, then it is best for them to go with short-term financing. Short-term financing really depends on what the business owner needs the loan for. The options for short-term financing could include a line of credit, a note, pledging receivables, or even factoring (Block, Hirt, Danielsen, 2009). One example of a business owner using short-term financing would be to purchase inventory for the next year. Long-term financing is done when a business owner needs a bigger amount of money and they want to pay it back in a longer period than just one year. The long-term financing options could be a term loan, preferred stock equity, or even a secured or unsecured loan (Block, Hirt, Danielsen...
Words: 319 - Pages: 2
...Journal Determinants of short-term debt financing Richard H. Fosberg William Paterson University ABSTRACT In this study, it is shown that both theories put forward to explain the amount of shortterm debt financing that a firm employs have validity. The matching principle correctly predicts that the amount of short-term debt financing that a firm uses is directly related to the quantity of the firm’s current assets. Additionally, other factors that have been shown to affect the levels of long-term debt financing that a firm employs are also shown to affect the amount of short-term debt financing that a firm uses. Specifically, the amount of firm short-term debt financing is shown to be inversely related to the amount of the firm’s non-debt tax shields, growth opportunities, product uniqueness and firm size. Additionally, short-term debt financing was found to be directly related to the quantity of tangible assets the firm owns. Keywords: Debt, Capital Structure, Matching Principle, Collateral, Financing Determinants of short-term, Page 1 111008 – Research in Business and Economics Journal INTRODUCTION The matching principle of finance is the standard theory used to explain the amount of short-term debt financing and other current liabilities that a firm has on its balance sheet. Briefly, the theory states that firms should finance their short-term assets with short-term liabilities (Guin (2011)). This implies that the amount of short-term debt financing that a firm uses depends...
Words: 4203 - Pages: 17
...non-liquidating aggregate stock of current assets will be | | |necessary to allow for floor displays, multiple items for selection, and other purposes. All of these “asset” | | |investments can drain the cash resources of the firm. | | | | |6-2. |Discuss the relative volatility of short- and long-term interest rates. | | | | | |Figure 6-10 shows the long-run view of short- and long-term interest rates. Normally, short-term rates are much more | | |volatile than long-term rates. | | | | |6-3. |What is the significance to working capital management of matching sales and production? | |...
Words: 6464 - Pages: 26
...Alternative Financing Plans Jessica Eyre FIN/200 June 17, 2012 Debora Almirall Axia College Show Calculations Lear, Inc., is $800,000, and only $350,000 from that money are considered as permanent current assets. Aside from that, the company also has $600,000 as their fixed assets. a) The company is planning to use their fixed assets and half of their permanent current assets for long-term financing, including 10% additional. Whereas, short-term financing costs 5%. The company earns around $200,000 without taxes and interest rates. Now, how much will the earning of the company be with tax, if they proceed with their financing plan, if the tax rate is 30%? Fixed Asset = $600,000 Permanent Current Asset = $350,000 Non-Permanent current Asset = $450,000 Total Asset financed through long term debt = $600,000 + 350,000 x 50% = $775,000 Interest on Long term debt = $775,000 x 10% = $77,500 Total Asset financed through short term debt = $450,000 + 350,000 x 50% = $625,000 Interest on short term debt = $625,000 x 5% = $31,250 Earnings Before Interest and Tax . . . . . . . . . . . . . $200,000 Less: Interest on Long term debt . . . . . . . . . . . . . ($77,500) Less: Interest on Short term debt . . . . . . . . . . . . . ($31,250) Profit Before Tax . . . . . . . . . . . . . . . . . . . . . . . . . $91,250 Less: Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ($27375) Profit after tax . . . . . . . . . . . . . . . . . ...
Words: 617 - Pages: 3
...made to trade creditors. Cash is obtained through a short-term bank loan. Cash is obtained through a long-term bank loan. A cash dividend is declared and paid. Accounts receivable are collected. Merchandise is purchased on account. Cash advances are made to employees. Minority interest in a firm is acquired for cash. Equipment is acquired for cash. + + + + + 0 0 0 + – 0 0 0 – – WCR 0 – + 0 0 + + 0 0 0 – 0 + 0 0 NSF – – 0 – + + 0 – + – 0 + + + NET PROFIT 0 + + – + 0 0 0 0 0 0 0 0 0 0 3. Reconstructing a balance sheet. Sales 20 days of sales 360 days of sales Accounts receivable 40 days of sales Inventory Inventory = $400,000 = ($400,000/20) × 360 = $7,200,000 = ($7,200,000/360) × 40 = $800,000 = Sales/6 = $7,200,000/6 = $1,200,000 Working capital requirement (WCR): WCR = .20 × Sales = .20 × $7,200,000 = $1,440,000 Accounts payable Since WCR Accounts payable = (Accounts receivable + Inventory) – Accounts payable, = (Accounts receivable + Inventory) – WCR = ($800,000 + $1,200,000) – $1,440,000 = $560,000 Net fixed assets Net fixed assets Net fixed assets = Total assets – Current assets = Total assets – Inventory – Accounts receivable – Cash = $5,000,000 – $1,200,000 – $800,000 – $400,000 = $2,600,000 Short-term debt Liabilities = .60 × total assets = .60 × $5,000,000 = $3,000,000 = Liabilities – Accounts payable = $3,000,000 – $560,000 = $2,440,000 = .10 × $2,440,000 = $244,000 = Financial debt – Short-term debt = $2,440,000 – $244,000 = $2,196,000 = Total...
Words: 836 - Pages: 4
...Working Capital Structure and Financing Pattern of Mauritian SMEs Kesseven Padachi*; C. Howorth[1]; M. S. Narasimhan[2] and R. Durbarry3 *School of Business, Management and Finance University of Technology, Mauritius La Tour Koenig, Pointe – aux – Sables, Mauritius kpadachi@utm.intnet.mu ABSTRACT The competitive nature of the business environment requires firms to adjust their strategies and adopt good financial policies to survive and sustain growth. Most firms have an important amount of cash invested in current assets, as well as substantial amounts of current liabilities as a source of financing. This paper therefore analyses the working capital structure and financing pattern of small to medium-sized Mauritian manufacturing firms, using primarily secondary data. Structural differences in working capital and the financing pattern of the sample firms are analysed and the results showed significant structural changes over the study period. The research finding revealed disproportionate increase in current asset investment in relation to sales resulting in sharp decline in working capital turnover. The analysis also revealed an increasing trend in the short-term component of working capital financing; in particular trade credit and other payables have financed the major part of working capital. This over-concentration on short-term funds is a reality of the SMEs as they often faced difficulties in raising finance and they are viewed to be informationally opaque....
Words: 9965 - Pages: 40
...CHAPTER: SHORT TERM FINANCING Topics to be Covered: 1. Meaning and nature of short-term financing. 2. Sources of Short Term Financing. 3. Advantages of Short-Term Financing. 4. Disadvantages of Short Term financing. 5. Purpose of Short-Term Financing. 6. “Ideal Concept” of Short-Term Financing. 7. What is Trade Credit? 8. Reasons for the use of Trade Credit. 9. Factors determining the amount of Trade Credit used 10. Cost of Trade Credit 11. Who bears the cost of Trade Credit? 12. What is Bank Credit? 13. Distinction between Bank Credit and Short Term credit. 14. Characteristics of Short Term financing Meaning and nature of short-term financing: Short Term financing is that from of financing which embraces borrowing or lending of funds for a short period of time. It refers to the finance obtained on short term basis, usually one year or less in duration. Short term finance is secured for financing the current assets, for example, inventories. Short term finance is also known as working capital which is the excess of current assets over current liabilities. Current liabilities become due within one year and indicate the amount of short-term credit being utilized by the business. Practically all enterprises use the short-term credit as sources of finance. We find in the balance sheets of almost all the companies some kinds of current liabilities which are the indicator of...
Words: 2541 - Pages: 11
...aaa“ANALYSIS OF LONG TERM FINANCING IN RIICO’’ A Summer Internship Project/Dissertation SUBMITTED FOR THE PARTIAL FULFILLMENT OF THE REQUIREMENT FOR THE AWARD OF Master of Business Administration SUBMITTED BY RAUNAK JAIN ROLL NO.-AUR1001049 UNDER GUIDANCE OF MS. ARPITA SHARMA AMITY BUSINESS SCHOOL AMITY UNIVERSITY RAJASTHAN 2010-2012 Acknowledgement Achieving A Milestone For Any Person Is Extremely Difficult. However, There Are Motivations Which Come Across The Curvaceous Path Like Twinkling Stars And Make Our Task Easier. An Opportunity Has Been Given To Me By Rajasthan Sate Industrial Development And Investment Corporation Limited. Jaipur For Summer Training In The Field Of Finance For The Period From 6 june 2011 To 21th July 2011 (45 Days) I Would Also Like To Express My Special Gratitude To Mr. P.M. Jain For Giving His Precious Time For Guiding Me And Help Me In Bringing Out The Work In The Present Shape And Sharing A Valuable Knowledge Which Help Me In Building The Future Edge Of My Career. Also I would Like To Thanks Mr. A.K Jahalani (Agm –Appraisal), Mr. Suneet Mathur (Osd-Infra/Finance), Mr. V.B.Mathur (Agm-F&R), Mr.A.C. Chhabra(Sr.Dgm-Finance), Mr.R.K.Limba(Dgm-Appraisal),Mr.P.K. Sharma(Dgm),Mr. Vishal Dixit, Anoop Kumar Mathur(Dgm-Pid). Unger The Supervision Of Sir Krishan Goyal Sipriya (Dgm(Finance)) Thanks To Sir For Giving Valuable Input Time To Time In The Course Of...
Words: 504 - Pages: 3
...following: The financing of long-term infrastructure, industrial projects and public services based upon a non-recourse or limited recourse financial structure where project debt and equity used to finance the project are paid back from the cash flow generated by the project. Q. 02. Discuss long-term & short-term source of project financing? Sources of financing a business are classified based on the time period for which the money is required. Time period are commonly classified into following three: * Long Term Sources of Finance: Long term financing means capital requirements for a period of more than 5 years to 10, 15, 20 years or may be more depending on other factors. Capital expenditures in fixed assets like plant and machinery, land and building etc. of a business are funded using long term sources of finance.. Long term financing sources can be in form of any of them: * Share Capital or Equity Shares * Preference Capital or Preference Shares * Retained Earnings or Internal Accruals * Debenture / Bonds * Term Loans from Financial Institutes, Government, and Commercial Banks * Venture Funding * Asset Securitization * International Financing by way of Euro Issue, Foreign Currency Loans, ADR, GDR etc. * Preference Capital or Preference Shares * Debenture / Bonds * Lease Finance * Hire Purchase Finance * Short Term Sources of Finance: Short term financing means financing for period of less than 1 year. Short term financing...
Words: 533 - Pages: 3
...Financing Options for XYZ Corporation Nicole Byes FIN / 410 August 03, 2015 Ruth Smith As corporations anticipate growth and inventory increase over time their financial managers need to understand the need for inventory financing and inventory management (Block, Hirt, & Danielson, 2009). Looking at the long-term trend XYZ Corporation assets are likely to increase over time. The key to current asset planning is the ability of management to forecast sales accurately and match the production schedules with the sales forecast. "Financial forecasting is essential to the strategic growth of a business. The process of forecasting forces a business to consider seasonal and other effects on cash flow. In essence, financial forecasting allows the financial manger to anticipate events before they occur, specifically the need for raising funds externally (Block, Hirt, & Danielson, 2009). The financial manger's selection of external sources of funds to finance assets may be one of the firm's most important decisions. "The axiom that all current assets should be financed by current liabilities (accounts payables, bank loans, etc.) is subject to challenge when one sees the permanent buildup that can occur in current asset (Block, Hirt, & Danielson, 2009)". According to our resources, XYZ Corporation is experiencing an average collection period of 120 days. The industry average is about 75 days. The corporation has also experienced an increase in its business in the...
Words: 790 - Pages: 4
...Lawrence Sports Working capital management is very important in running a business because it involves managing all current assets and liabilities. Working capital management involves making appropriate investments in cash, marketable securities, receivables, and inventories, as well as the level and mix of short-term financing (Emery, Finnerty, Stowe, 2007, p. 639, para. 3). Currently Lawrence sports, a multi-million dollar company that manufactures and distributes sports equipment is seeking a way to better manage its’ capital, lower loan burdens, and undertake better business deals with its’ three business partners. Management can solve this issue with working capital policies that reduce future difficulties. Alternative Working Capital Policies As the newly appointed finance manager, one must be fully aware of the companies operating expenses, principal source of finance, suppliers and current financial stance and process with the lending bank. Understanding how all of these relationships can cohesively work together is key to being a success in this new role. By being properly prepared and developing successful working capital policy, the company will always have balanced receivables and payables due to working and negotiating with Lawrence Sport’s customers and suppliers. This type of communication and action plan will result in optimizing revenue, decreasing cash borrowed turn-around time, positive business relations and maintaining positive cash balance thus...
Words: 1870 - Pages: 8
...When we think about short term financing we refer to any investment, financial plan, or anything else lasting for one year or less. Short term investment and financial plans usually involve less uncertainty than long term investments and financial plans, reason being market trends are more easily predictable for one year than for any longer period. Short term financial plans are more easily amendable as a result of the short time frame. A short term financial plan usually involves investing in short term securities, such as T bills or commercial paper. When we are discussing long term financing we are describing a plan, strategy, security, or anything else with a term longer than one year. The exact number of years varies according to the usage. A long term financial plan outlines investment and other financial goals for any time more than one fiscal year, while a long term bond has a maturity of 10 or more years. Anything long term involves more uncertainty than anything short term because market trends are more easily predict able in the short term. Planning for the long term is necessary one’s plan must be flexible to account for its inherent uncertainty. There’s totally difference when we look at both short term and long term financing when we think of buying a house or a car we are talking long term financing, on the other hand when we take out a payday loan it is talking about short term because we are paying that back within a week or so. References Financial...
Words: 260 - Pages: 2
...recommendation. Finally, this paper will discuss an implementation plan for the team’s recommendation. Alternate Capital Policies Current Policy (Conservative Approach) The current policy in place at Lawrence is one that can be considered a conservative approach. The Conservative Approach uses long-term financing for the company’s long term assets, a few of the company’s temporary current assets, and all of the company’s permanent current assets (Emery et al., 2008). This has resulted in high costs of financing for Lawrence Sports with little risk; causing the company’s profitability to be low. Simply put; Lawrence has predominantly financed all of its current assets using long-term sources of financing where only a small portion of its assets sing short-term financing. This presents the risk of Lawrence developing a liquidity issue as a result of withdrawal of the company’s source of finance; meaning that Lawrence may come close to exhausting its available sources of financing options. Maturity Matching Approach Another alternative approach is the Maturity-Matching Approach. According to chapter 22, the Maturity-Matching Approach “finances long-term assets by issuing long-term debt and equity securities. In addition,...
Words: 1680 - Pages: 7
