Financing the Short Term Obligations of The Business - Coursework Example

Sources of short term finances available to a business 1. Trade credit – this is also referred as suppliers’ credit, ledger credit or open book account. It is needed when commercial purchases are not to be cleared immediately. In this case the company holds an accounts payable for the amount it owes to the suppliers while in turn running business on not paid for bills. Trade credit varies in length, type of customers and terms prevailing in a particular industry. However, the customer has to forego any discounts that would have been offered on prompt payment.

The company can resolve to one month single statement bill or even the open book; this is where they have an extra ten days to clear the bill (Guerard, 2007, 108). 2. Bank loans – companies source for commercial loans from banks in order to meet or cover temporary gross working capital needs. The loan can either be secured or nonsecured. Secured loans have a lien against a company’s asset e.g. inventory, outstanding receivables et cetera, or a pledge of credit, to back the loan. Unsecured loans are issued depending on creditworthiness of the business.

The cost of the loan varies with its size and rates charged on the loan. However, a prime rate is used as a benchmark for these types of loans. Other methods used are revolving line where money is lent on a recurring basis; letters of credit where the bank guarantees by writing, the payment of a company’s overdraft for a given period of time and for specified amounts (Gitman, 2003, 24). 3. Open market commercial papers – these are negotiable notes with maturities from a range of one to nine months which are floated on the market by big corporations.

Commercial paper dealers sell the issues to pension funds, smaller commercial banks, corporations, insurance companies to raise funds. The rates on commercial papers are however, below the prime rate for loans. The advantage to the company using commercial papers for borrowing funds is that the issue is widely distributed in the national market. This frees the company from relying on commercial banks. 4. Finance companies and factors – large commercial companies are deemed as the departmental stores of the financial world.

These companies have subsidiaries or branches where they practice direct sales financing. They are in close contact with dealers of their merchandise therefore can offer goods to be paid for on installments. Their rates are much higher than commercial banks. Factoring arrangements are based on an advance of funds to a company by the factor against an assignment of trade receivables. An agreement is signed between the two companies to govern their relation. This is usually on a continuous basis depending on the terms applied by the two companies.

Nonrecourse factoring allows the factor to buy the accounts of the company and takes up the losses thereto. However, in recourse factoring, the factor does not take up the loss on bad accounts. Either case, factoring charges are based on a firms daily balance, general interest rate, specific factoring agreement and outstanding credit (Guerard, 2007, 115). Question two a) Financing Mark and spencer uses short term borrowings from banks and medium term notes to source for funds. Trade credit has been used for meeting financial obligations.

Morrison on the other hand, has applied trade credits, borrowings from banks to source for short term funds. b) Liquidity ratios liquidity ratios for Mark & spencer Current Ratio = Total