Short-term borrowing sources are categorized into bank sources and non-bank sources.

Bank sources

Bank sources include uncommitted and committed lines of credit and revolving lines of credit.

Uncommitted lines of credit

Uncommitted lines of credit are least reliable because the bank may decide to not honor request (banks do not provide any official confirmation of its existence). No fee.

Committed lines of credit

Committed (regular) lines of credit are unsecured, pre-payable, and more reliable than uncommitted lines because banks acknowledge their existence and they are included in the annual reports. They have maturity 364 days which results in their classification has current liabilities. Banks charge a commitment fee (typically half a percent, applicable to undrawn amount) and interest is typical primate rate or money market rate plus a spread.

Revolving lines of credit

Revolving lines of credit are the most reliable means of short-term credit. They are similar to regular lines on features such as commitment fee, interest rate, etc., but are of larger amounts and maybe for multiple periods.

Goals of short-term financing strategy

The goal of effective short-term financial strategy to maintain liquidity (i.e. (a) sufficient capacity to meet cash needs, (b) from sufficient sources, (c) at cost-effective rates), without impairing long-term stability.

Determinants of a short-term borrowing strategy include the size and creditworthiness of the borrower, sufficient diversification in terms of sources of funds, and flexibility of borrowing options (i.e. management of loans such that they do not all mature and keeping track of market conditions).

The passive strategy is most common when lending options are limited, and it involves rollover of existing facilities with a single lender.

An active strategy is a more flexible strategy made possible by more refined forecasting. Active strategies may be matching when they attempt to match receipt of large cash flows with the maturity of short-term borrowing.

Asset-based loans

If a company has a weak financial position, it may not be able to raise unsecured loans, but may be required to pledge assets (typically receivables and inventories) to obtain financing. Such loans are called asset-based loans.

Receivables financing

Receivables are either assigned (in which case it remains responsible for collection) or factored (in which case, they are sold, and collection is the responsibility of the buyer).

Inventory-backed loans

In an inventory blanket lien, the lender has a claim on part of all of the inventories which the borrower can use in its operation; in a trust receipt arrangement, in which borrower certificates that the inventories are held in trust and that any sales proceeds would go to the lender; or a warehouse receipt trust, in which inventories are held in trust by a third-party.

Computing the cost of borrowing

In order to compare different sources of loans, it is important to calculate their costs using the same basis. The most appropriate approach is to calculate the cost with reference to net proceeds, and include commitment fees, dealer charges and other costs in total costs.

$$ Cost\ =\frac{Interest\ +\ Commitment\ Fee}{Loan\ Amount} $$

For discount-based loans, the following formula calculates cost (with reference to net proceeds)

$$ Cost\ =\frac{Interest}{Loan\ Amount-Interest} $$

$$ Cost\ =\frac{Interest\ +\ Dealer\prime s\ Commission\ +\ Backup\ Costs}{Loan\ Amount-Interest} $$

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