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(^346) Financial Management
Chapter-13
Working Capital Financing
Accruals, trade credit, commercial Banks advances, public deposits, Inter Corporate
Deposits, Short Term Loans from Financial Institutions, Debentures for working capital,
Commercial Paper, Factoring, Regulation of Bank Finance ñ Recommendation of Latest
Committee.
This chapter discusses sources of financing. By convention all sources of financing
that must be repaid within one year are considered to be shortñterm, those that must be
repaid in one to five years are intermediate term, and all sources with maturities longer
than five years are classified longñterm.
Two major issues are involved in managing the firmís use of short-term financing:
(1) How much short-term financing should the firm use? and (2) What specific sources
of short-term financing should be selected? The earlier chapter used the bedging principle
of workingñcapital management to answer the first of these two questions. Basically,
that involved an attempt to match temporary needs for funds with short-term sources
of financing and permanent needs with longñterm sources.^1 The objective of this chapter
will be to answer the second of the above questions:
How should the financial manager select a source of short-term credit?
In general, three basic factors should be considered in selecting a source of short-term
credit: (1) the effective cost of credit, (2) the availability of credit in the amount needed
and for the period of time when financing is required, and (3) the influence of the use of
a particular credit source on the cost and availability of other sources. We discuss the
problem of estimating the cost of short-term credit before.
Introducing the various sources of credit, as the procedure used is the same for all. The
second and third factors listed above are each discussed as they pertain to the individual
sources of short-term credit.
Estimating the Cost of Short-Term Credit
(^1) Temporary needs for funds arise in response to a temporary need for current assets. These include current
assets that the firm does not plan to hold throughout the indefinite future. Permanent needs for funds arise
in conjunction with a permanent need for certain assets. These assets consist of fixed assets plus the firmís
minimum level of investment in current assets. Thus, when discussing working-capital management we
abandoned the current-fixed assets classification in favour of the more useful concept of temporary and
permanent assets.