INTRODUCTION OF TOPIC:

Short-Term Financing
 Spontaneous Financing
 Negotiated Financing

Spontaneous Financing
Trade credit, and other payables and accruals, that arises spontaneously in the
firm’s day-to-day operations. Can be categorized according to whether or not the source is
spontaneous. Accounts payable and accrued expenses are classified as spontaneous
because they arise naturally from the firm's day-to-day transactions. Their magnitude is
primarily a function of a company's level of operations. As operations expand, these
liabilities typically increase and finance a part of the build-up in assets. Spontaneous
sources are those sources which occur and result from the normal business activities. In
the usual course of business operations, a firm might be getting goods and services for
which payments are to be made at a later stage with a time gap. These sources are
generally unsecured and vary in line with the change in sales level. These are also known
as current liabilities.

Types of spontaneous financing

 Accounts Payable (Trade Credit from Suppliers)
 Accrued Expenses

1.Trade Credit :
Credit granted from one business to another. When a firm buys goods from
another, it may not normally be required to pay for these goods immediately. During this
period, before the payment becomes due, the purchaser has a debt outstanding to the
supplier. This debt is recorded in the buyer's balance sheet as creditors and the
corresponding account for the supplier is that of debtors. Normal business transactions,
therefore, provide the firm with a source of short-term financing, because of the time gap

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between the receipt of goods and services and payment thereof. The trade credit may be
defined as the credit extended in connection with goods and services purchased for resale.
It is the "resale" which distinguishes trade credit from other sources. The credit extended
in connection with the goods purchased for resale by a retailer or a wholesaler of raw
materials, used by a manufacturer in producing finished products is called trade credit.

Examples of trade credit are:

Open Accounts: the seller ships goods to the buyer with an invoice specifying goods
shipped, total amount due, and terms of the sale.
Notes Payable: the buyer signs a note that evidences a debt to the seller.
Trade Acceptances: the seller draws a draft on the buyer that orders the buyer to pay the
draft at some future time period.
Examples
Draft -- A signed, written order by which the first party (drawer) instructs a second party
(drawee) to pay a specified amount of money to a third party (payee). The drawer and
payee are often one and the same.

Terms of the Sale

 COD and CBD - No Trade Credit: the buyer pays cash on delivery or cash
before delivery. This reduces the seller’s risk under COD to the buyer refusing the
shipment or eliminates it completely for CBD.
 Net Period - No Cash Discount -- when credit is extended, the seller specifies the
period of time allowed for payment. “Net 30” implies full payment in 30 days
from the invoice date.
 Net Period - Cash Discount -- when credit is extended, the seller specifies the
period of time allowed for payment and offers a cash discount if paid in the early
part of the period. “2/10, net 30” implies full payment within 30 days from the
invoice date less a 2% discount if paid within 10 days.
 Seasonal Dating -- credit terms that encourage the buyer of seasonal products to
take delivery before the peak sales period and to defer payment until after the peak
sales period.

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Trade Credit as a Means of Financing
What happens to accounts payable if a firm purchases $1,000/day at “net 30”?
$1,000 x 30 days = $30,000 account balance
What happens to accounts payable if a firm purchases $1,500/day at “net 30”?
$1,500 x 30 days = $45,000 account balance
A $15,000 increase from operations!

Cost to Forgo a Discount

What is the approximate annual cost to forgo the cash discount of “2/10, net 30”
after the first ten days?
Approximate annual interest cost =
% discount x 365 days
(100% - % discount) (Payment date -discount period)

Approximate annual interest cost =

2% x 365 days
(100% - 2%) (30 days - 10 days)

= (2/98) x (365/20) = 37.2%

Payment Date* Annual rate of interest

11 744.9%
20 74.5
30 37.2
60 14.9
90 9.3
* days from invoice date

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Stretching Account Payables
Postponing payment beyond the end of the net (credit) period is known as
“stretching accounts payable” or “leaning on the trade

Who Bears the Cost of Funds for Trade Credit?

Suppliers: when trade costs cannot be passed on to buyers because of price competition
and demand.
Buyers: when costs can be fully passed on through higher prices to the buyer by the
seller.
Both: when costs can partially be passed on to buyers by sellers.

2.Accrued Expenses:
Amounts owed but not yet paid for wages, taxes, interest, and dividends. The accrued
expenses account is a short-term liability.
Wages: Benefits accrue via no direct cash costs, but costs can develop by reduced
employee morale and efficiency.
Taxes: Benefits accrue until the due date, but costs of penalties and interest beyond the
due date reduce the benefits.

Negotiated financing:
 To arrange or settle by discussion and mutual agreement.
 To transfer title to or ownership of (a promissory note, for example) to another
party by delivery or by delivery and endorsement in return for value received.
 To sell or discount (assets or securities, for example).

Types of negotiated financing:

Money Market Credit

 Commercial Paper
 Bankers’ Acceptances

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Unsecured Loans*
 Line of Credit
 Revolving Credit Agreement
 Transaction Loan

Commercial Paper:
Short-term, unsecured promissory notes, generally issued by large corporations (
Commercial paper market is composed of the
(1) Dealer
(2) direct-placement markets.
Advantage: Cheaper than a short-term business loan from a commercial bank. Dealers
require a line of credit to ensure that the commercial paper is paid off.

Letter of credit (L/C):

A promise from a third party (usually a bank) for payment in the event that certain
conditions are met. It is frequently used to guarantee payment of an obligation. Best for
lesser-known firms to access lower cost funds.
For example: A bank provides a letter of credit, for a fee, guaranteeing the investor that
the company’s obligation will be paid.

Bankers’ Acceptances:
Short-term promissory trade notes for which a bank (by having “accepted” them)
promises to pay the holder the face amount at maturity.
 Used to facilitate foreign trade or the shipment of certain marketable goods.
 Liquid market provides rates similar to commercial paper rates

Short-Term Business Loans:

Unsecured Loans -- A form of debt for money borrowed that is not backed by the pledge
of specific assets.

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Line of Credit (with a bank) An informal arrangement between a bank and its customer
specifying the maximum amount of credit the bank will permit the firm to owe at any one
time.
 One-year limit that is reviewed prior to renewal to determine if conditions
necessitate a change.
 Credit line is based on the bank’s assessment of the creditworthiness and credit
needs of the firm.
 “Cleanup” provision requires the firm to owe the bank nothing for a period of
time.

Revolving Credit Agreement:

A formal, legal commitment to extend credit up to some maximum amount over a

stated period of time.
 Firm receives revolving credit by paying a commitment fee on any unused portion
of the maximum amount of credit.
 Commitment fee: A fee charged by the lender for agreeing to hold credit
available.
 Agreements frequently extend beyond 1 year.
Transaction Loan:

 A loan agreement that meets the short-term funds needs of the firm for a single,
specific purpose.
 Each request is handled as a separate transaction by the bank, and project loan
determination is based on the cash-flow ability of the borrower.
 The loan is paid off at the completion of the project by the firm from resulting
cash flows.

Secured Loans:

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A form of debt for money borrowed in which specific assets have been pledged to
guarantee payment.

Security (collateral): Asset (s) pledged by a borrower to ensure repayment of a loan. If

the borrower defaults, the lender may sell the security to pay off the loan.

Collateral value depends on:

 Marketability
 Life
 Riskiness

Detour: Cost of Borrowing

Interest Rates
Prime Rate -- Short-term interest rate charged by banks to large, creditworthy customers.

Differential from prime depends on:

 Cash balances
 Other business with the bank
 Cost of servicing the loan

Compensating Balances
Demand deposits maintained by a firm to compensate a bank for services
provided, credit lines, or loans.

Commitment Fees
The fee charged by the lender for agreeing to hold credit available is on the unused
portions of credit.

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SELECTED ORGANIZATION:

Bank Alfalah Limited is a private bank in Pakistan owned by the Abu Dhabi

Group. Bank Alfalah was incorporated on June 21, 1992 as a public limited company

under the Companies Ordinance 1984. Its banking operations commenced from

November 1, 1992. The bank is engaged in commercial banking and related services as

defined in the Banking companies ordinance, 1962.

Bank Alfalah Limited was launched on June 21, 1992 as a public limited company under

the Companies Ordinance 1984. The bank commenced its operations on November 1,

1992. The bank introduced commercial banking and related services as defined in the

Banking companies’ ordinance, 1962.

After a few years, the bank introduced its new identity of H.C.E.B after the

privatization in 1997. The management of the bank had implemented strategies and

policies so the bank would become a major player in the market. With a partnership with

the Abu Dhabi Group the position of the bank became stronger which allowed the bank to

invest more in revolutionary technology to increase its range of products and services.

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 The bank is currently operating through more than 321 branches domestically and

an international presence in Afghanistan, Bangladesh and Bahrain, with the registered

office at B.A.Building, I.I.Chundrigar, and Karachi. Some of the main branches are

located in all of the major cities including: Hyderabad, Lahore, Kasur, Islamabad,

Gawadar, Peshawar, Faisalabad, Quetta, D.I.Khan, Rawalpindi, Sargodha, Sukkur,

Sialkot, Multan, Dera Ghazi Khan, Murree, Attock District, Gujranwala, Pirmahal,

Mirpur Khas, and Mandi Bahauddin etc.

Functions
• Branch banking
o E.g. Deposits, Remittances, Foreign trade, Lockers.
• Consumer banking
o E.g. Credit Cards, Auto loans, Home loans, Consumer durables, RTCs.
• Electronic Banking
o e.g. Telephone banking, ATMs, Online banking
• Corporate banking
o E.g. Short/Long Term finances, Trade finance, structured finance.
• Treasury & Investment
o e.g. Money market, Forex market, Investments, Government securities,
Correspondent banking.

The segments of the Bank include trading and sales, retail banking, commercial
banking, and corporate finance. Trading and sales includes fixed income, equity, foreign
exchanges, commodities, credit, funding, own position securities, lending and repos,
brokerage debt and prime brokerage. Retail banking includes retail lending and deposits,
banking services, trusts and estates, private lending and deposits, banking service, trust
and estates investment advice, merchant/commercial/corporate cards and private labels,
and retail. Commercial banking includes project finance, corporate finance, real estate,
export finance, trade finance, factoring, leasing, lending, guarantees, bill of exchange and

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deposits. Corporate finance includes services, which include acquisition, mergers,
underwriting, privatization, securitization, research, debts, equity, syndication, initial
public offer and secondary private placements.

SPONTANEOUS FINANCING;

In bank Alfalah it includes:

CAR FINANCING:

BAL’s recently introduced car leasing facility for individuals and corporate sector
has set new dimensions for the product. Now you are provided with the option of either to
get the vehicle leased or financed.

INSURANCE

Renowned and reliable Insurance companies are offering the competitive rates of
Insurance. Pay year insurance premium in advance {at the time of down payment} and
remaining in the subsequent equal monthly installment.

HOW MUCH EXTRA MONEY BEING PAID? {MARK-UP}

Offering lowest rate of markup of 9.5%, {per annum}, BAL has captivated a
major market share and so is the plan for future.

REPAYMENTS: Easily affordable installments on monthly basis in the form of

postdated cheques will set you free of depositing your rental cheques every month.

SECURITY: Hypothecation of vehicle in the name of the Bank Alfalah Limited.

YOU CAN ACT AS A CO BORROWER: Acting as a co borrower, will enables your

family members {spouse, children- 18 year and above} to avail the financing facility and
can get the car registered in their names as well.

Current Markup Rates & Charges

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1. Processing fee (non-refundable)
For financing upto Rs. 1.00 M Rs. 5,000
For financing upto Rs. 5.00 M Rs. 10,000
For financing upto Rs. 10.00 M Rs. 20,000

2. Mark-up rates

For SVR (Standard Variable Rate) option:

SBP discount rate + 1%, Currently 7.5% + 1% = 8.5%

For fixed rate option:

 1 Year 7% p.a
 2 Year 8% p.a
 3 Year 9% p.a

3. Late Payment Charges : Rs. 400/- per late payment.

4. Prepayment Charges: Upto 5% of the outstanding amount.

Negotiated financing of bank alfalha:

Money Market Credit

Money market of bank ALFALAH is including:

 Short term money market inter-bank trading.

 Active Treasury Bills trading in secondary market.

 Forward – forward inter-bank money market trading.

 Money market linked lending to and borrowing from corporate clients.

Line of Credit

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Bank ALFALH USE line of credit for unsecured loans

Agriculture financing:

Bank Alfalah Limited acknowledging the vital role of a agriculture in the

economic development of Pakistan has designed Rural Finance Program named as
"BANK ALFALAH ZARIE SAHULAT". The product is designed to cater for multiple
financing requirements of our farming sector.

We are caring our customers through chain of complete, distinguished and

specialized products for agriculture sector. BAL Branches are designed to help the
farmers with expert advice, technical know-how and Credit for their multifarious
activities through timely, affordable and attainable modes tosuit farmer requirements.

BANK ALFALAH ZARIE SAHULAT is available for Short, Medium and Long terms.

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Bank Alfalah Limited Strategy is to focus on following Objectives:

 Provide reliable infrastructure for Agri customers.

 Help farmers utilize funds efficiently and effectively.

 Provide farmers an integrated package of credit, supervision and technical know-

how.

Bank Alfalah Limited is committed to make dreams come true by making Pakistan's Rural
Economy healthier and stronger.

Data Collection method:

I have completed the secondary research, which included using the library and
databases to find current articles about recycling programs in other areas. Several
references had particularly relevant data that will be useful as I write my report. To collect
data from, my financial management class.

SWOT ANALYSIS:

Strengths:

 Humble management
 Young and energetic workforce
 Highly qualified and trained employees
 Crucial location of branches
 Highly professional human resource department
 strong market in middle eastern countries

Weaknesses:
 Small size
 Less efficient computer and IT systems

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  Disproportionate presence of old staff in the upper management
 No advertising in electronic media
 It is slow in the introduction of new services
 It is step behind in using new technology as compared to other banks

Opportunities:
 Extension of local branch network
 Establishing foreign branch network
 Capitalizing on information technology
 Unexplored market of Multinational Corporation
 Growth in textile sector

Threats:
 Private sector bank
 Heavy reliability on only one market segments
 Network expansion by foreign bank
 Terrorist image of the country
 Inconsistency in government policies

Conclusion:
Currently bank Alfalah ha highly market share and is not facing any risk. Due to
highly professionals it is used to make progress leaps and bonds. the main objective of the
bank is to build strong relationship with the customer and make them believe that bank
Alfalah is right for them by providing effective and efficient services.

Recommendation:
 Misdistribution of work
 Participative management
 Fax machines and photocopying machine

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  Training programs

References:
 www.bankalfalah.com

 www.encylopedia.com

 www.dostco.com

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