Learning objectives of this chapter include: Identify the main forms of short-term borrowing by Australian companies, understand the characteristics of trade credit and calculate the implied interest rate, understand the main forms of bank lending and appreciate when each may be suitable to a borrower’s needs, | Chapter 9 Sources of Short-Term Debt 2 2 2 2 2 2 Learning Objectives Identify the main forms of short-term borrowing by Australian companies. Understand the characteristics of trade credit and calculate the implied interest rate. Understand the main forms of bank lending and appreciate when each may be suitable to a borrower’s needs. 3 3 3 3 Learning Objectives (cont.) Understand debtor finance, inventory loans and bridging finance, and be able to distinguish between them. Understand the basic features of the interbank cash market. Understand the process of using promissory notes and bills of exchange to raise funds. Calculate prices and yields for promissory notes and bills of exchange. 3 3 3 3 Introduction ‘Short-term debt’ is defined as debt due for repayment within a period of 12 months. The major short-term borrowing choices available to Australian companies are: Trade credit. Borrowing from banks and other financial institutions. Issuing short-term marketable debt . | Chapter 9 Sources of Short-Term Debt 2 2 2 2 2 2 Learning Objectives Identify the main forms of short-term borrowing by Australian companies. Understand the characteristics of trade credit and calculate the implied interest rate. Understand the main forms of bank lending and appreciate when each may be suitable to a borrower’s needs. 3 3 3 3 Learning Objectives (cont.) Understand debtor finance, inventory loans and bridging finance, and be able to distinguish between them. Understand the basic features of the interbank cash market. Understand the process of using promissory notes and bills of exchange to raise funds. Calculate prices and yields for promissory notes and bills of exchange. 3 3 3 3 Introduction ‘Short-term debt’ is defined as debt due for repayment within a period of 12 months. The major short-term borrowing choices available to Australian companies are: Trade credit. Borrowing from banks and other financial institutions. Issuing short-term marketable debt securities such as promissory notes and bills of exchange. 4 4 4 4 Trade Credit When companies sell goods or services to other businesses ‘on credit’. Usually, the seller allows the purchaser several weeks to pay. Thus, trade credit is, in effect, a form of short-term debt in which the seller lends the purchase price to the purchaser. 5 5 5 Borrowing from Banks and Other Financial Institutions Bank overdraft An overdraft permits a company to run its current (cheque) account into deficit up to an agreed limit. The cost of a bank overdraft includes the interest cost and fees. The interest rate charged is usually at a margin above an indicator rate, published regularly by the bank, and only on the amount by which the account is overdrawn. 6 6 6 Borrowing From Banks and Other Financial Institutions (cont.) Debtor financing Debtor finance allows a company to raise funds by selling its accounts receivable on a continuing basis to a financier (called a discounter), who is then responsible
