INTERNATIONAL TRADE FINANCE ASSIGNMENT 1

Sources of Finance

Ravleen Ahuja

Niagara College, Toronto Campus

International Trade Finance, IBM

Kenneth Sylvester

February 3, 2022
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Sources of finance

Sources of finance are the different ways by which businesses are provided with funds for the
industrial requirements. These sources are meant to fulfill a business’s long term and short term
goals may it be a new or an old firm. Business expenses can vary from the daily activities to
construction of the office building or even purchasing raw materials.

Sources of finance for short-term

Funds provided for a shorter duration of time are commonly known as Working Capital. These
funds are utilized towards purchasing raw materials or even paying the daily wages. The various
providers are:
● Commercial Bank Loans
● Trade Credit
● Commercial Papers
● Secured Loans

1) Commercial Bank Loans - As a business plans to grow, commercial banks provide the
necessary amount needed for expansion in the form of loans. The repayment of these
loans can be done either as a whole on maturity or in installments throughout the life of
the loan.

2) Trade Credit - Materials are purchased on a credit basis from other firms. This is also
known as debt payable. If the debt is paid promptly, a special discount is provided but if
not, the payment shall be cleared in 30 days. This is also the largest source of short-term
credit.

3) Commercial Papers - These are promissory notes that are sold to banks, other
businesses or insurance companies.The issue time is 2-6 months and the rate of interest is
lower than that pain on bank loans.

4) Secured Loans - These loans require necessary collateral to be passed. This collateral
acts as a form of security which can be sold to recover the payment if the businesses fail
to pay. It can be any asset including land, house, cars etc. Sometimes unsecured loans are
provided to those who have a good credit score.
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Banks, the only sources of short - term funds

Therefore, it can be observed that although banks are the most common source of providing
funds, they are not the only sources. The first priority is always trade credit.

INVESTMENT RISKS

There are various types of risks that are involved while making an investment. These are
qualified into two categories:

1) Political Risk - Changes made in domestic/international regions like terrorist attack,

heavy taxation, military coups, governmen regulation.

2) Currency Risk - Fluctuations in currency rates might cause high risks for the
investments in foreign markets. This can be reduced by investing in various markets at a
single time.

3) Interest Rate Risk - Changes in the economic market have a huge impact on
investments. Usually bonds are affected by this change as an increase in the interest rate
will lead to issuing new bonds with the higher rate which will eventually decrease the
value of old bonds issued at older rates and vice versa.
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4) Liquidity Risk - Risks involved with the inability of selling or buying the investments in
an open market. Over-the-counter markets and small-cap stocks are highly affected by
this risk as investments in these markets have lower demand.

5) Credit Risk - When companies are unable to pay back the investors, they fall under
credit risk. This is also common between bond issuers who fail to pay either the interest
or the principal amount on maturity.

USAGE OF LIABILITIES FOR RAISING LONG TERM CAPITAL

1) Debt (Bonds) - Bonds are the promissory notes that are sold to a firm which state that the
firm is obligated to pay interest. If a firm fails to do so, secured bondholders are entitled
to the whole value of the asset plus interest. Businesses that go for long term debts are
those who have large profit margins or stable sales.

2) Equity (stocks) - There are two types of stock - preferred and common. Preferred stock
is of a higher priority due to the high claims on liquidation.The dividends on this stock
are fixed and the company that issues it has the additional benefit of limited dividend and
no maturity.