CHAPTER 4

SOURCES AND
USES OF SHORT-
TERM AND
LONG-TERM
FUNDS
Sources of Short-Term Funds
Sources of short-term financing may be
unsecured or secured, they appear as
currents liabilities.

 Spontaneous Sources of Short-Term Funds

- Refers to the sources that automatically
arise from the normal operations of a business
firm

Deliberate Sources Short-Term of funds

- Refers to the source that can be made use
by the deliberate act.
Advantages and Disadvantages
of Short-term financing
 Easier to arrange
 Less expensive
 Provides the borrower more flexibility

 Interest rates fluctuate more often

 Refinancing is frequently needed
 And because of Early maturities, the credit
standing of the borrower may easily be
adversely affected by delinquent payments
Factors to be considered in
Choosing Sources of Short-term
financing
 Cost

 Restrictions

 Flexibility

 Reliability
of the lender as a source of
future borrowing
 Trade Credits
- Refers to acquisition of merchandise (or raw
materials) on open account

Credit Terms
2/10, N/30 – 2% Discount if paid within ten days from
date of invoice, account is due in 30 days

2/10, 1/20, N/30 – 2% discount if paid within ten days

from date of invoice, 1% discount if paid after ten days
up to the 20th day, accounts is due in 30 days

2/10, N/30, EOM – 2% discount if paid within ten days

from the end of the month account is due in 30 days
from the end of the month
Foregoing Discounts on
Purchases
 An implicit cost is a cost that has occurred but it is
not initially shown or reported as a separate cost.
On the other hand, an explicit cost is one that has
occurred and is clearly reported as a separate
cost

 Explicit cost, also called as Actual Cost is the cost

actually incurred by the firm for making all the
physical payments and the contractual
obligations. The physical payments include the
cost of material, labor, plant, equipment, building,
technology, advertisement, etc.
 Cost Foregoing Discounts
Opportunity Cost
 The benefit of profit that the company
fails to enjoy

Cost of Bank Borrowing

 The cost borrowed money from financial
institutions

Stretching Accounts payable

 Scheduling payments for accounts
payable beyond their due dates reduces
the implicit cost of foregoing discounts
 Sources of long-term Funds
 Long term liabilities and stockholders equity
- Long term mortgage of plant and other real
estates items owned by the company
- Long term chattel mortgage of property and
equipment and other movable assets owned by
the business
- Issuance of long term commercial papers
- Issuance of corporate bonds
- Issuance of shares of capital stocks, common
and preferred
Long term debt is known as debt of capital and
stockholders equity

Long term loans standard requirements:

 Torrents title of real estate
 Purchase invoice/certificate of ownership for
movable property
 Tax declaration for real property
 Insurance coverage for buildings and movable
property
 Audited financial statements
Factoring Accounts Receivable and
Discounting of notes Receivable
 Factoring of accounts receivable- the transfer of the
receivable is done on a notification basis
 Discounting of notes receivable- refers to indorsing a
promissory note in favor of another party, usually a financial
institution.

Terms used in discounting notes

 Maturity value- refers to amount due on the note at maturity
date.
 Discount- refers to the amount of interest deducted by the
financing company
 Discount rate- is the rate used by the financing institution in
computing for then discount
 Discount period- is the length of time from the date of
discounting to maturity date of the note.