Principles of Managerial Finance

CHAPTER 15 Current Liabilities Management 657

TABLE 15.2

Summary of Key Features of Common Sources of Short-Term Financing

Type ofshort-term financing

Source

Cost or conditions

Characteristics

I. Spontaneous liabilitiesAccounts payable

Suppliers of

No stated cost except when a cash discount is

Credit extended on open account for 0 to 120 days.

merchandise

offered for early payment.

The largest source of short-term financing.

Accruals

Employees and

Free.

Result because wages (employees) and taxes

government

(government) are paid at discrete points in time after the service has been rendered. Hard to manip-ulate this source of financing.

II. Unsecured sources of short-term loansBank sources

(1) Single-payment notes

Commercial banks

Prime plus 0% to 4% risk premium—fixed or

A single-payment loan used to meet a funds sh

ortage

floating rate.

expected to last only a short period of time.

(2) Lines of credit

Commercial banks

Prime plus 0% to 4% risk premium—fixed or

A prearranged borrowing limit under which funds, i

f

floating rate. Often must maintain 10% to 20%

available, will be lent to allow the borrower to meet

compensating balance and clean up the line

seasonal needs.

annually.

(3) Revolving credit

Commercial banks

Prime plus 0% to 4% risk premium—fixed or

A line-of-credit agreement under which the avail

a-

agreements

floating rate. Often must maintain 10% to 20%

bility of funds is guaranteed. Often for a period

compensating balance and pay a commitment fee

greater than 1 year.

of approximately 0.5% of the average unused balance.

Commercial paper

Business firms—

Generally 2% to 4% below the prime rate of

An unsecured short-term promissory note issued by

both nonfinancial

interest.

the most financially sound firms.

and financial

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